How to Calculate Interest on a Car Loan
January 28, 2020
When you take out an auto loan—or any other loan, for that matter—you must pay back the amount you borrowed and the interest on top of it. Your lender gives you the interest rate, but how does that translate to actual interest payments on your loan?
We want to show Macon, Warner Robins, and Milledgeville drivers how to calculate interest on a car loan. Learn how to crunch the numbers below and contact us at Macon Car Credit if you have questions!
What Is Interest?
So, why do you have to pay interest on top of the principal amount you borrowed? Think of interest as a fee for using someone else’s money—that is, the lender you borrowed from.
In most cases, the longer your car loan term is, the more you’ll pay in interest (and you may possibly see higher interest rates as well). Savvy car shoppers keep their loan terms to a minimum to keep interest at a manageable level.
How Amortizing Car Loans Work
Car loans are known as amortizing loans. With these loans, the principal of the loan is paid down during the life of the loan according to an amortization schedule, generally through equal payments.
Each payment to the lender includes a portion of interest and a portion of principal. Your payments will be the same each month, but the ratio of interest to principal will change over time. These payments are usually weighted toward interest at first, and the balance shifts toward principal over time.
Calculating Interest on a Car Loan
You can always use an online interest calculator to see how much you’ll pay in interest each month. If you’d rather do it by hand, use this formula:
Divide your interest rate (expressed as a decimal) by the number of payments you’ll make in a year (12, if you pay monthly). Then, multiply it by the balance of your loan. For the first payment, that balance will be your full principal amount. Now you know how to calculate interest on a car loan!
Once you’ve started paying off your principal, you’ll need to calculate your new balance before you work out the interest you’ll pay in each following month. Use this simple formula:
Subtract the interest payment you just calculated from the amount you repaid. Then, take the resulting amount away from the original principal, and you’ll be left with the new balance of your loan. Plug this value in as the loan principal in the original formula.
Fuzzy on the Math? Let Us Help
We want to help shoppers in Macon, and around Warner Robins and Milledgeville, understand their car loan payments as fully as possible.
If you’re planning out your auto financing and want more clarity on interest, feel free to reach out to our team at Macon Car Credit. We’ll help you score the lowest possible rates—and understand how they’ll affect your monthly interest payments!