How to Calculate Interest Rate on a Car Loan

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If you’re taking out a loan for a new vehicle for the first time or need a refresher, you should be prepared to handle the interest rate that comes along with it. That’s why Weir Canyon Acura is here to help you learn how to calculate interest rate on a car so you can get your finances in order faster, organize your payments, and get behind the wheel of your new car faster. Learn more with the help of our automotive finance professionals today!

What Is an Interest Rate?

%Costa Mesa and Tustin drivers taking out a car loan for the first time may be wondering, what is an interest rate? If you buy a car on credit, the dealer essentially owns the car until it’s paid off, so you’re basically paying a fee to the dealer for borrowing the money. The interest you pay is determined by several factors, which include:

  • Principal Amount: This is the total amount you wish to borrow with your auto loan.
  • Loan Term: The loan term is the set amount of time you’ll have to repay your loan. Generally speaking, short-term loans have higher monthly payment amounts with less interest paid in the end, while long-term loans have smaller monthly payment amounts with higher interest paid in the end.
  • Repayment Schedule: Most auto loan payments are made on a monthly basis, but you could save money in the long-run if you’re able to make payments more frequently. Thanks to compounding, you pay less interest when you make more payments.
  • Repayment Amount: A portion of every payment you make goes to interest and another portion goes to repaying your total principal amount.

How to Figure Interest on a Car Loan for First Payment

When it comes to knowing how to figure interest on car loan for the first time, you have to take into account that this initial payment will be slightly different from subsequent payments. This can be done easily using the following steps:

  1. Divide your interest rate by the number of monthly payments you will be making in this year.
  2. Multiply it by the balance of your loan – for the first payment, this will be your total principal amount.

How to Calculate Auto Loan Interest Moving Forward

Once the first payment has passed, you’ll have to recalculate your auto loan interest moving forward. While this may not be an exact calculation, following the steps below can serve as a reliable basis for you to plan for the months ahead:

  1. Subtract the interest you just calculated from the payment you just made. 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.

Find More Finance Help with the Experts at Weir Canyon Acura

After learning how to calculate auto loan interest, you can take advantage of even more car buying tips at Weir Canyon Acura such as good mileage for a used car, how to trade in a financed car, how financing works, or buying vs. leasing. And, our finance team is always on hand to walk you through all of your options, answer any questions, and show off our inventory to help you find a vehicle that matches your budget and your needs. Contact us today to learn more and to schedule a visit to our dealership near Montclair!

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