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How to Calculate Interest Rate on a Car Loan

Finance Paperwork with Glasses

When you take out a loan in Centerville or Miamisburg, you are charged interest – but how does this affect your wallet? Find out how to calculate the interest rate on a car loan, and learn how this impacts your monthly payments and total loan amount with the finance team at Voss Hyundai.

What is an Interest Rate?

Before we go into how to calculate an interest rate on a car, what is an interest rate? When you get a car loan, the lender owns the vehicle until your loan is paid off in full. Think of the interest rate as the fee that you pay the lender for the duration of your contract. But, the interest rate isn’t the same for all drivers, which is why it’s important to learn how to figure interest on a car loan. Here are a few terms to know before we dive into the calculations:

  • Principal Amount: This is the total dollar amount that you are hoping to borrow from your lender to cover the cost of the car.
  • Loan Term: This refers to the length of your contract. Shorter loans have higher monthly payments, but lower interest overall. Longer loans have lower monthly payments, but more interest over time.
  • Repayment Schedule: Most Kettering drivers will pay monthly payments, but you can always pay more frequently to save money over time. This ends up being less interest, due to compounding.
  • Repayment Amount: Only a portion of your monthly payments goes to the principal, since some also goes into interest.

How to Calculate Auto Loan Interest for the First Payment

How to calculate interest rate on a car for the first payment is slightly different than the subsequent payments, so here is the formula for the initial bill:

  1. Divide your interest rate by the number of monthly payments you will make for the entire year.
  2. Multiply it by the balance of your loan, or your whole principal amount.
  3. This should be the amount of interest for the first month..

How to Calculate Auto Loan Interest for Going Forward

After you’ve paid your first month, learn how to figure interest on a car loan from this point onward:

  1. Subtract the interest you just calculated from the payment you just made. This gives you the amount that you have paid off the loan principal.
  2. Deduct this total from your original principal to get your new loan balance.
  3. Keep in mind that, due to rounding, you won’t have a precise number each time. But, this provides a good estimate.

Get Expert Financial Advice with Voss Hyundai

Learning just how to calculate the interest rate on a car loan can feel a little overwhelming, but you’re not alone in Dayton. Contact us at Voss Hyundai to learn more about the auto financing process, and whether you’re better off taking a loan at a dealership vs. bank.

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