How to Calculate the Interest Rate on a Car Loan

If you’re taking out a loan for your next Ames ride, you will be charged interest. Many drivers ask us about how to calculate auto loan interest on their auto loans. If you’re wondering how to figure out interest on a car loan, the DeYarman Automotive Group finance team is here to help. Learn how to calculate the interest rate on a car and more below. When you’re ready to schedule an appointment, contact us online.

What is an Interest Rate?

As you’re determining how to calculate the interest rate on a car loan, we need to explore what interest is and what will impact it. If you buy a car on credit near Indianola, your lender will own the vehicle until it is paid off. The interest rate you’re paying is a fee paid to the lenders for using their money to buy said model. When answering how to calculate auto loan interest, this rate will depend on the following factors:

• Principal Amount: This is the dollar amount you are looking to borrow.
• Loan Term: This refers to the length of time you will be repaying your loan. In general, shorter loan terms will equal higher repayments, but less interest paid in the long run. With long-term loans, you will have lower monthly payments, yet end up paying more in the long run.
• Repayment Schedule: Most car payments are paid monthly, but making payments more often will save you money. Thanks to compounding, when you make more payments, you pay less interest. 
• Repayment Amount: With each car loan payment made, a portion goes to interest, while another goes to repaying your principal.

How to Calculate Auto Loan Interest for First Payment

As you’re determining how to calculate the interest rate on a car loan for your initial payment, you can use the following quick calculation:

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

The final number will give you the interest amount you will pay for the first month.

How to Figure Interest on a Car Loan Going Forward

Once you’ve begun paying down your initial principal, you’ll have to know how to calculate the interest rate on a car loan in the following months. To accomplish this, you’ll need to do the following:

1. Subtract the interest you calculate from the payment you just made, and this leaves 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 number rounding and human error mean you won’t have an exact calculation every time, this provides a good basis for how to calculate the interest rate on a car loan.

Get Help From the Financial Professionals at DeYarman Automotive Group

Now that you have learned how to figure interest on a car loan, turn to one of the best car dealerships in the Des Moines area. With multiple locations and finance teams, DeYarman Automotive Group is here to find a vehicle and a plan best suited to your needs and budgets. 

If you’re still trying to find the right vehicle for your Ames rides, use our vehicle finder service to sort through your available options. Find the perfect lease on your next car with DeYarman Automotive Group!