How to Calculate the Interest Rate on a Car Loan

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When you need to take out an auto loan to buy a car in the South Brunswick area, you will get charged interest, but how much does your interest rate impact your monthly payments and the total amount owed? You’ve learned how to use our auto loan calculator, now the financial experts at Land Rover Princeton are going over how to calculate the interest rate on a car loan. Don’t hesitate to reach out to us if you have.

What is an Interest Rate?

To start, let’s look at what is an interest rate and the factors that impact it. If you’re shopping for a car around the Mount Laurel and Hopewell areas, and you plan to buy a car using credit, your lender owns the car until you can pay the loan amount off. The interest rate you pay is a fee for using the lender’s money to buy a car. What interest rate you end up paying your lender for borrowing their money is based on several factors, such as:

  • Principal Amount: The principal amount is the dollar amount you want to borrow.
  • Loan Term: The loan term is how long you will be repaying the car loan. Shorter-term auto loans usually mean higher repayments, but less interest paid in the long run. With longer terms, you will have lower monthly payments but end up paying more.
  • Repayment Schedule: The majority of car payments are made monthly. However, if you can make payments more often, you will end up saving even more money. When you make more payments, you pay less interest.
  • Repayment Amount: With every car loan payment you make, a portion goes to interest, and a portion goes to repay your principal.

Calculate Auto Loan Interest for Your First Payment

If you want to learn how to calculate auto loan interest for the initial payment, you can use this fast calculation:

  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.

This is the amount you will be paying in interest for the first month.

How to Figure Interest on a Car Loan Moving Forward

Once you have started paying down your initial principal, you can calculate the new balance to work out the interest you will pay in the following months. To figure this amount, follow the steps below:

  1. Subtract the interest you just calculated from the payment you just made, and this leaves 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.

There is human error, and number rounding means that you can’t get the exact calculation every time. However, this gives you a good idea of how to calculate the interest rate on a car loan.

Get Help From the Financial Professionals at Land Rover Princeton

If this seems a little overwhelming, our finance team in Princeton is standing by to answer your questions. Give us a call, and we can walk you through the process of how to calculate interest on a car at Land Rover Princeton.

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