How to Calculate the Interest Rate on a Car Loan

Anytime you finance a car, truck, or SUV, you’ll be charged an interest rate on your auto loan. Your interest rate is impacted by factors like the cost of the vehicle, your credit score, the length of the loan, and more. Figuring out how to calculate auto loan interest is a great way to improve your position as a buyer before showing up at the dealership. Continue reading to learn more about how to calculate the interest rate on a car loan and possibly save money on your next DeYarman Ford Indianola purchase, and feel free to reach out to our finance center with any questions regarding auto loan interest rates. 

What is an Interest Rate?

As mentioned above, any auto loan will have an interest rate attached to it. The interest rate is the amount the lender charges you for borrowing money to pay for your vehicle. The interest rate is determined by several factors, including:

• Your credit score
• Loan amount
• Length of the loan term
• Down payment
• Monthly payments

You can lower your interest rate by making a larger down payment, offering to make larger monthly payments, and improving your credit score before beginning the buying process.

How to Calculate Auto Loan Interest for the First Payment

When trying to figure out the interest rate on a car loan, these are the steps you follow:

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.

Using this simple formula, you can figure out the amount of interest on your first car payment.

How to Figure 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 pay in the following months. To do this:

After your initial payment, you should calculate your new balance and figure out how much interest you’ll pay on your car loan in the following months. Here’s how to calculate the interest rate on a car loan for the following months:

1. Subtract the interest you calculated in the previous formula, leaving you with the amount you’ve paid on the loan principle.
2. Simply subtract the total you got from the previous equation from the original amount of the loan to see your new loan balance.

Get Help from the Financial Professionals at DeYarman Ford Indianola

As you can see, figuring out how much interest you pay each month on your auto loan is fairly simple, but remember that your calculations will be prone to the occasional human error. If you’d like to learn more about financing, contact us with any questions. If you’d like to see how your interest rate could impact your monthly payments, our Payment Calculator can help you with that. And since we’re on the subject of financing, if you already know what vehicle in the DeYarman Ford Indianola inventory you’d like to make yours, you can apply for financing online and get approved instantly!