How to Calculate Interest Rate on a Car Loan

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When you take out a loan to buy a new vehicle near Bridgewater, you’ll be charged interest. How much will your interest rate impact your monthly payments and total amount owed? Learn more with Flemington INFINITI as we discuss how to calculate interest rate on a car loan, below.

What Is an Interest Rate?

Before we cover how to figure interest on a car loan, let’s first take a look at what interest is, and the factors that can impact it. If you buy a car on credit, your lender owns the vehicle until the time it is fully paid off. The interest rate you pay is essentially a fee you pay your lender because you’re using their money to buy your vehicle. The interest rate you end up paying your lender can be influenced by a number of factors, including:

  • Principal Amount: This is the dollar amount you need to borrow.
  • Loan Term: Your loan term is the repayment period for your loan. Generally, shorter loan terms bring higher repayments, and less interest paid overall. Longer terms, on the other hand, typically have lower repayments but can charge you more interest when all is said and done.
  • Repayment Schedule: Most Princeton, NJ drivers will be on a monthly repayment schedule, but if you’re able to make payments more often, it can save you money over time. Thanks to compounding, making more payments allows you to pay less interest.
  • Repayment Amount: Every time you make a payment on your auto loan, a portion of it goes to interest and a portion goes to repaying your principal.

How to Calculate Auto Loan Interest for the First Payment

If you need to know how to calculate auto loan interest for your first payment, you can follow this simple calculation:

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

The number you get is the interest you’ll pay for the first month of your repayment period.

How to Figure Interest on a Car Loan Going Forward

Once you’ve begun to pay off your principal, you’ll want to calculate your new balance to figure the interest you’ll pay in the coming months. Here’s how:

  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.

You’ll need to round the answer up or down, meaning you won’t get an exact number every single time, but this will provide a good idea of how to calculate interest rate on a car and how much you’ll pay over time.

Consult the Finance Experts at Flemington INFINITI for Additional Help

If you’re feeling a bit overwhelmed as you learn how to calculate interest rate on a car, the friendly professionals at our finance center near Bensalem, PA are here to help! They’ll take you step-by-step through how to figure interest on a car loan, answering all of your questions along the way. Contact us for additional help, if you ask questions about trading in a financed car, what is good mileage on a used carused car leasing, how car finance works, and if you’re looking to get a basic start to estimate the monthly payments for the new vehicle you’ve got your eye on, check out our online payment calculator.

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