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How to Calculate the Interest Rate on a Car Loan

Are you planning to take out a loan on a new vehicle from The Autobarn Volkswagen of Countryside? Keep in mind that you will also be charged interest in addition to the cost of the vehicle. Because of this, you will want to know how much your interest rate will impact your monthly payments and the total amount you owe on the vehicle you choose. Wondering how to calculate interest rate on a car? Here, the VW finance experts at The Autobarn Volkswagen of Countryside explain how.

Car Loan Interest Rate Basics

Before learning how to figure interest on a car loan, it is a good idea to become more familiar with what an interest rate truly is and what goes into calculating it. If you purchase a car on credit, the lender is actually the one that owns your vehicle until you make all of the payments. When the car is paid off, it is officially yours. Essentially, an interest rate is a fee you pay the lender for using their money to purchase your vehicle. How to calculate auto loan interest depends on a few different factors:

  • Principal Amount: The principal amount is the dollar amount you are interested in borrowing.
  • Loan Term: The loan term is how long you are planning to take to pay the loan off in its entirety. If you opt for a shorter loan, your monthly payments will be higher, but you will end up paying less in interest over time. If you choose a longer term loan, you can expect lower monthly payments; however, it will cost you more in interest.
  • Repayment Schedule: Most car payments are done monthly, although you may want to consider making more frequent payments to save yourself money in the long run. With compounding, you are able to make more payments to pay less interest.
  • Repayment Amount: Every time you make a car loan payment, some of the money is put toward interest, and the rest goes toward repaying your principal.
Man and woman talking to finance specialist at dealership

How to Calculate Auto Loan Interest for First Payment

Do you have questions on how to calculate auto loan interest for the initial payment? It’s easy with the quick calculation below:

  1. Divide your interest rate by the number of monthly payments you will be making throughout the year.
  2. Multiply it by the balance of your loan. For the first payment, that balance is the full principal amount.

When you do this, you will know how much interest you will be paying for the first month.

How to Figure Interest on a Car Loan Going Forward

As you continue to make payments toward the initial principal amount, you will have to calculate the new balance, so you can determine interest for future months. Try using the steps below:

  1. Subtract the interest you just calculated from the payment you just made. By doing this, you will have the amount that you have paid toward the loan principal.
  2. Deduct this total from your original principal to find your current balance.

Keep in mind you won’t have an exact calculation each time due to human error and rounding, but this calculation should still give you a good idea of your interest payments.

The Auto Finance Experts at The Autobarn Volkswagen of Countryside Can Help

For more information regarding VW finance, turn to your greater Chicago auto finance experts, The Autobarn Volkswagen of Countryside. We would be glad to assist you and help you find the perfect vehicle for a price that fits within your budget. Contact us today for more information. You can also try our convenient payment calculator in the meantime.

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