Before you learn how to figure interest on a car loan, it is a good idea to have a basic knowledge of what interest actually is. If you secure credit to purchase your vehicle, it means that the lender is the one who actually owns the car until you have paid it in full. The interest rate you pay is essentially a fee you pay the lender for using their money to purchase your vehicle. There are a few factors that can affect the amount you pay in interest for the vehicle of your choice.
Principal Amount: The principal amount is the actual amount you are looking to borrow from the lender.
Loan Term: This term means the length of time you will be repaying the loan. If you have a shorter loan term, you usually can expect higher monthly payments, but the benefit is that you will end up paying less in interest. If you opt for a loan with longer terms, you can expect to pay less per month, but you’ll end up paying more in interest.
Repayment Schedule: Usually, you will end up only making one car payment per month, but you have the option of making your payments more often. Thanks to compounding, when you make more payments you end up paying less in interest.
Repayment Amount: With every car loan payment you make, a portion goes to interest and a portion goes to repay your principal.
How to Calculate Auto Loan Interest for First Payment
There is a quick and easy way to figure out how to calculate auto loan interest for the initial payment.
Divide your interest rate by the number of monthly payments you will be making this year.
Multiply it by the balance of your loan, which for the first payment, will be your whole principal amount.
This will let you know how much interest you will be charged for the first month of repaying your loan.
How to Figure Interest on a Car Loan For Future Months
Once you have started to pay down your initial principal, it is necessary to calculate your new balance so you know how much interest you will be paying going forward.
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.
Deduct this total from your original principal to get your new loan balance.
Because these numbers are rounded, your calculations won’t always be exact, but they provide a good estimate for how to calculate the interest rate on a car loan.
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