How to Calculate the Interest Rate on a Car Loan

Ready to upgrade your ride to a luxury vehicle and an American classic? We’ve got an auto loan for you through our finance center that might make owning a new or certified pre-owned Cadillac a reality. You could see one of our beautiful cars in your Peoria garage in no time! If you’re concerned about your monthly payment, you’ll need to know about your interest rate. Wondering how to calculate interest on a car loan? Find out all the details with our informative guide. 

What Is an Interest Rate?

The interest rate on your auto loan determines how much you pay the lender for using their money to purchase your vehicle near Bloomington. Think of the interest as the fees you pay to the lender, gradually over the course of several months, for the privilege of using the lender’s money to purchase your luxury vehicle.

What interest rate you end up paying is based on a variety of factors, including:

• Principal Amount: The principal is the dollar amount you want to borrow. This is the final amount you pay for your vehicle after you lower the price with a down payment and/or trading in your current vehicle.
• Loan Term: This is the length of time you will spend repaying the loan if you don’t make extra payments. In general, shorter loan terms mean higher monthly payments but lower interest paid in the long run. With longer terms on the loan, you generally have lower monthly payments, but pay more interest in the long run. Loan terms typically run from 12 to 84 months, depending on the lender.
• Repayment Schedule: Most car payments are done monthly. But if you can make payments more often, you could save money on interest when you put the extra payments towards the principal. This works because interest is compounded. The overall interest you owe will decrease and lower your overall costs of ownership if you can make extra payments to pay off the loan sooner.
• Repayment Amount: With every car loan payment you make, a portion goes to interest and a portion goes to the principal. You can see the itemized list of where your monthly payment goes. Let’s say your first monthly payment is $400. Because your loan is new, you might pay $300 in interest and $100 in principal. By month 12, your interest/principal ratio might go to $250/$150, and so on. You can pay off your auto loan at any time. Start this process by requesting the payoff amount from your lender.

How to Calculate Auto Loan Interest for the First Payment

When figuring out how to calculate auto loan interest for the initial payment you can use this quick 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 gives you the amount of interest you pay the first month of vehicle ownership.

How to Figure Interest on a Car Loan Going Forward

Once you have started to pay down your principal, calculate your new balance to work out the interest you pay in the following months. 

Use this method:

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. 

You can always contact your lender to find out exactly how much you will owe the next month.

We Can Answer Your Auto Loan Questions!

Still have questions about interest on an auto loan? Contact us or call (866) 361-6907 to talk to our finance center. We can walk you through every aspect of how to calculate the interest rate on a car at Ray Dennison Cadillac. If you’re interested in Cadillac leasing, we can assist you with that, too. We’d love to put a new or new-to-you vehicle in your Morton garage!