How to Calculate Interest Rate on a Car Loan

December 14th, 2018 by

Finance-UsedCars

When taking out a loan, you’re going to be charged interest. How much does this interest impact your monthly payments and the total amount owed in the end? Find out when you calculate your interest rate and car loan estimate at Acura of Avon. Have any questions? Contact our finance department.

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What is an Interest Rate?

If you take out a loan, the vehicle belongs to the lender until paid off. An interest rate is a fee that the lender charges you as long as you’re making payments on the vehicle. The interest rate ends up being based on a few factors including:

  • Principal Amount: This is the amount you’re looking to borrow.
  • Loan Term: This is the length of time you’ll be repaying the loan. Normally, shorter loan terms mean a higher payment each month, and less interest over time.
  • Repayment Schedule: While payments are normally made monthly, you can make payments as often as you can and this means less interest being paid as the loan will be paid off before the loan term agreed upon.
  • Repayment Amount: With each payment, part goes to the interest and the other part goes to repay your principal.

How to Calculate Auto Loan Interest for First Payment

For the amount of interest you pay int he first month, use this trick. You can calculate this amount by:

  • Dividing your interest rate by the number of monthly payments you’ll make over the year.
  • Then multiplying it by the balance of the loan, which is the whole principal amount for the first payment.

Interest on Your Car Loan Going Forward

Once you’ve paid the initial principal, calculate the new balance to find out the interest you’ll be paying in the following months. In order to find this amount, follow these steps:

  1. Subtract the interest you calculated from your first payment. This will give you the amount that you paid off the loan principal.
  2. Deduct this total from your original principal for the new loan balance.

You may not get an exact number with human error and rounding being factors, but this number is as close to the real estimate as you can get.

Get Help from the Acura of Avon Finance Center

If math isn’t your strong suit or you’d rather get an estimate from the professionals, contact our finance department. Our expert finance team has the answers you need. Whether you want to know how the value your trade tool works or you’re looking to ask about a loan, visit us today near Hartford.

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