Interest Rate

How to Calculate the Interest Rate on a Car Loan

When you take out a loan for a new vehicle for your Farragut commute, you’ll have to pay back the loan over time plus interest. Your total monthly payments will depend on how much the interest rate is. To find out how much the interest rate affects your monthly payments, learn how to calculate auto loan interest with the experts at Ole Ben Franklin Motors. Then, visit us for any of your car-buying questions.

Interest Rate Factors

Before we learn how to figure interest on a car loan, it’s important to understand the basics of what an interest rate is and the factors that affect it. When you take out a loan, you use credit to purchase a vehicle. The lender then technically owns the vehicle until you pay it off. So, the interest rate you pay on top of the loan is essentially a fee for using the lender’s money to buy the vehicle. 

So, to learn how to calculate the interest rate on a car loan, you’ll need to know what kinds of factors affect the interest rate: 

  • Principal Amount: This is the dollar amount you’re wanting to borrow from a lender. 
  • Loan Term: This is the amount of time it will take you to repay the loan. The shorter the term, the higher the payments but the lower the interest. The longer the term, the lower the payments but the higher the interest. 
  • Repayment Schedule: This is when you can make more payments on the loan than previously scheduled. So, if you can make an extra payment here and there, then you can pay off your loan faster over time. 
  • Repayment Amount: When you make a car payment, a portion goes toward the interest and also goes towards the dollar amount. 

How to Figure Interest On a Car Loan for the First Payment

Your first payment will be slightly different from all of the rest of your payments on your auto loan. Here’s how you figure out how much your first payment will cost: 

  1. Divine the interest rate by the total number of monthly payments you’ll make in the first year. 
  2. Multiply this number by the loan balance. For the first payment, this will be the entire principal amount. 
  3. This will show you how much interest you’ll pay the first month. 

How to Calculate Auto Loan Interest Going Forward

After you make your first payment, you’ll then need to determine how much you’ll pay going forward. If you’re like many Sevierville drivers who are new to taking out a loan, here’s how to do it: 

  1. Take the interest rate you just calculated above, and subtract that number from the payment you just made for your first payment. What’s left is how much you’ve paid off of the principal amount. 
  2. Take the total amount, and subtract it from the original principal to get the new loan balance. 

You won’t always get a perfect number every time, but the goal is to get as close as you can. Use our loan payment calculator at Ole Ben Franklin Motors to help give you an estimate if you get stuck, and visit us in Knoxville for all of your finance questions. 

Get Your Finance Questions Answered at Ole Ben Franklin Motors

For more car-buying questions and concerns, reach out to the finance center at Ole Ben Franklin Motors. Contact us online or visit us in Knoxville for a consultation.

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