How to Calculate Interest Rate on a Car Loan

car form application and close up on key fob

If you’re planning to take out an auto loan for your next new vehicle in Corona, you should expect to be charged interest. With that said, you may be wondering how much your monthly payments and total amount owed will be impacted by your interest rate. To learn more, join BMW of Murrieta as we explore how interest rates are determined and how to calculate interest rate on a car loan, below.

What Is an Interest Rate?

Before we dive deep into how to calculate auto loan interest, we’ll need to look further into what interest is and how your interest rate is arrived at. When you purchase a car on credit, your lender technically owns your vehicle until it’s been fully paid off. You can think of your interest rate as a fee you pay the lender for borrowing their money to buy your vehicle. The interest rate you’re quoted is determined by a number of factors, including:

  • Principal Amount: This is the total amount you wish to borrow with your auto loan.
  • Loan Term: The loan term is the 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 Calculate Interest On a Car Loan: Formula for First Payment

When you’re calculating auto loan interest for your first payment, use this simple calculation:

  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.

Note: Following this formula gives you the amount of interest you’ll pay the first month.

How to Calculate Auto Loan Interest Moving Forward

Once you start making auto loan payments, you’ll want to calculate your new balance to figure out the interest you’ll pay in the coming months. Here’s how to calculate the interest on a car loan moving forward:

  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.

Human error and the need to round your answer up or down means you won’t have an exact calculation every time you work it out, but you can consider this a reliable basis for how to figure interest on a car loan. This will help you find a vehicle that works with your budget, creating a simpler car-buying process for Riverside shoppers.

Need Additional Help? Consult with BMW of Murrieta

We understand if you’re feeling a bit overwhelmed! If you have lingering questions surrounding how to calculate the interest rate on a car, the friendly finance team at BMW of Murrieta is here to assist. When you visit our dealership near Ontario, our finance specialists will walk you through the process, step-by-step. You may also find our monthly payment calculator to be of help, and if you’d like, we invite you to apply for BMW financing online.

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