How to Calculate the Interest Rate on a Car Loan

Before you borrow money to buy a new or used vehicle, see if you need a refresher on how to calculate the interest rate on a car loan. When you know how to calculate auto loan interest you’ll be better able to negotiate the monthly payments that you want. The finance department at Nissan of Florence has everything you need to know about how to calculate the interest rate on a car and more. 

What is an Interest Rate?

Before you learn how to figure interest on a car loan, let’s go over the facts you need to know about interest rates and car loans in Darlington and Dillon. When you purchase a vehicle with a loan, technically the lender owns your vehicle until you make the final payment. Interest is the fee you pay for being able to borrow money from a lender. Before you learn how to calculate the interest rate on a car loan, get familiar with these terms: 

• Repayment Amount: With every car loan payment you make, a portion goes to interest and a portion goes to repay your principal amount.
• Principal Amount: The dollar amount you need to borrow. 
• Loan Term: The length of time you will be repaying the loan. Generally, the shorter the loan term, the higher your payments, but more of your money will go toward the principal and less toward interest. If you choose a longer loan term, you’ll pay more interest but will likely have smaller monthly payments.
• Repayment Schedule: Most car payments are made monthly, but if you can make payments more often, you can possibly save money over time. When you make more payments you pay less interest. 

How to Calculate Auto Loan Interest for First Payment

This quick calculation will tell you how much your first loan payment will be. 

1. Divide your interest rate by the number of monthly payments you will be making this year. 
2. Multiply your number from the first step by the balance of your loan. This is the amount you’ll pay.

This gives you the amount of interest you pay the first month.

How to Figure Interest on a Car Loan After the First Payment

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:

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 Nissan of Florence

Learning how to calculate the interest rate on a car is a bit overwhelming. Need some help? The professionals in the Nissan of Florence finance department are here. Bring them your questions about how to calculate the interest rate on a car and they’ll give you the information you need to get on track to purchase your new car near Sumter!