How to Calculate the Interest Rate on a Car Loan

Are you getting ready to purchase a new or used vehicle for your Dallas drives? If you plan on financing your vehicle, you’ll likely want to know how to calculate the interest rate on a car loan. Finding out the interest rates you qualify for can be as easy as applying for financing online. However, you might also be curious about how much your car loan interest will cost over time. East Dallas Volkswagen is happy to help. Read the guide below to learn more about how to calculate the interest rate on a car, and let us know if you have any questions.

What is an Interest Rate?

When looking at how to figure interest on a car loan, we first need to touch on what interest is and the factors that impact it. If you purchase a car on credit, your lender owns your vehicle until it is paid off. The interest rate is a fee you pay the lender for using their money to purchase your vehicle. The interest rate you end up paying your lender is based on a variety of factors, including:

• Principal Amount: The principal amount is the dollar amount you are looking to borrow. 
• Loan Term: This term means the length of time you will be repaying the loan. In general, shorter loan terms equal higher repayments with less interest paid in the long run. With longer terms, you generally have lower monthly payments but end up paying more 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 Calculate Auto Loan Interest for the First Payment

When figuring out how to calculate auto loan interest for the initial payment, you can use this quick 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 Out Interest on a Car Loan Going Forward

Once you have started to pay down your initial principal, you need to calculate your new balance to work out the interest you will pay in the following months. To do this:

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. 

Get Help From the Financial Professionals at East Dallas Volkswagen

Our friendly team is here to help Mesquite and Richardson drivers meet their financial and automotive goals. If you have any remaining questions about how to calculate the interest rate on a car loan or any other car-buying topics, don’t hesitate to reach out! We’re always happy to help.