How to Calculate Interest Rate On a Car Loan

Loan Application

When you’re preparing to take out an auto loan for a new vehicle in San Antonio, you’ll need to consider your interest rate before choosing a lender so you don’t have to ask about car payment deferment later on. In this comprehensive guide, the friendly professionals from the finance team at Aston Martin Houston discuss how to calculate the interest rate on a car loan so you can feel confident about your final choice when it comes time to sign on the dotted line.

What is an Interest Rate?

Before we can learn how to figure interest on a car loan, we’ll first need to take a look at what interest is, as well as what the factors are that can affect the rate you’re offered.

So, what is interest? When you purchase a vehicle on credit with an auto loan, your lender owns the vehicle until it is paid off in full. The interest rate the borrower pays is essentially a fee collected by the lender for using their money to buy your vehicle. The interest rate you must pay your lender is impacted by several factors, including:

  • Principal Amount: The principal amount is the dollar amount you are looking to borrow.
  • Loan Term: The loan term references the length of time you’ll be given to repay your auto loan. There are two types of loan terms: short-term and long-term. With a short-term loan your monthly payment amount will be higher, but you’ll pay less interest overall. Conversely, long-term loans offer a smaller monthly payment amount with more interest paid in the long run.
  • Repayment Schedule: Most borrowers will make monthly car payments, but if you can manage to make payments more frequently, you could see significant savings over time. Thanks to compounding, you pay less interest when you make more payments.
  • Repayment Amount: Every payment you make to your lender will see a portion allocated to interest, and a portion allocated to repaying the principal amount.

How to Calculate Auto Loan Interest for Your Initial Payment

Learning how to calculate auto loan interest for your very first payment is simple! You’ll just need to perform this quick calculation:

  1. Divide your interest rate by the number of monthly payments you will be making this year.
  2. Multiply the number from step one by the balance of your loan; for the first payment, this will be your entire principal amount.

Now you’ve determined how much interest you’ll pay for the first month of your auto loan!

How to Calculate the Interest Rate On a Car Moving Forward

Once you’ve made your initial auto loan payment, figuring the interest you’ll pay moving forward will require a different calculation. Here’s how you’ll do it:

  1. Subtract the interest you calculated above from the payment amount you just made. The number you’re left with is the amount you’ve paid off your loan principal so far.
  2. To find your new loan balance, subtract this number from your original principal to see what your new loan balance is.

Keep in mind: The need to round up or down means you won’t end up with an exact calculation every time, but this should serve as an easy-to-follow basis for how to calculate the interest rate on a car.

Consult with Aston Martin Houston to Learn More

We understand if you’re feeling a little stressed as you aim to find the right auto loan for your circumstances. If you have any remaining questions regarding interest rate or are seeking additional car-buying tips, the team at Aston Martin Houston is here to support you. Contact us anytime, and be sure to consult our online finance information center. Still deciding on the right new or used luxury vehicle for your drives from Sugarland to The Woodlands? Apply for financing to get pre-approved, then visit our Houston showroom to find a model you’ll love!

Aston Martin Houston 29.783246, -95.442392.