How to Calculate the Interest Rate on a Car Loan

You know when you take out a loan for a new or used car you’re going to be charged interest by your lender. Do you know how to calculate the interest rate on a car loan? The finance center at Five Star Cadillac has your guide to how to calculate the interest rate on a car, along with everything you need to know about interest rates and how they impact your monthly payment plan. 

What is an Interest Rate?

Before we jump into how to calculate auto loan interest, let’s start at the beginning and talk about what an interest rate is. If you take out a loan for a vehicle in Macon or Byron, the lender technically owns that vehicle until you repay the loan. Interest is a percentage of the loan that’s added to the loan’s total amount. Why? Interest is, basically, the fee you pay the lender for loaning you the money. But an interest rate isn’t a number pulled from thin air. Here are the factors that dictate an interest rate: 

• Principal Amount: the dollar amount you apply to borrow 
• Loan Term: the length of time you will be repaying the loan. Shorter loan terms equal higher repayments, but less interest paid in the long run. A longer loan term means lower monthly payments, but end up paying more in interest in the long run. 
• Repayment Schedule: Most car payments are done monthly, but if you can make payments more often it could save you money over time. Thanks to compounding, when you make more payments you pay less interest. 
• Repayment Amount: With every car loan payment you make, a portion goes to interest and a portion goes to repay your principal. 

How to Figure Interest on a Car Loan for the First Payment

When learning how to calculate the interest rate for an auto loan for the inial payment, use this calculation: 

1. Divide your interest rate by the number of monthly payments you will be making this year. 
2. Multiply it by the balance of your loan, which for the first payment, will be your whole principal amount.

This gives you the amount of interest you pay the first month.

How to Figure Interest on a Car Loan Going Forward

Here’s how to calculate the interest rate on a car loan for the remainder of the loan’s term: 

1. Subtract the interest you just calculated from the payment you just made and this will leave you with the amount that you have paid off the loan principal.
2. Deduct this total from your original principal to get your new loan balance. 

While human error and number rounding mean you won’t have an exact calculation every time, this gives you a good basis for how to calculate the interest rate on a car loan. 

Let the Financial Pros at Five Star Cadillac Help! 

At Five Star Cadillac, we’re here to assist you at every turn in the car-buying process should you need it. That includes having a great team of financial professionals on staff in our finance center to answer your questions. You can also calculate the value of your trade-in and your monthly car payments from the comfort of your home.