Understanding how to calculate auto loan interest is essential to making informed financial decisions. Whether you’re in the early stages of car shopping or have an existing auto loan, knowing how to calculate auto loan interest empowers you. Here, we’ll explain how to figure interest on a car loan.
Below, the team at Land Rover Santa Monica is eager to provide Los Angeles and Marina Del Rey shoppers with the details on how to calculate auto loan interest.
The first step in calculating your car loan interest rate is to grasp the variables involved:
Your principal amount is the total cost of the car minus your down payment and any trade-in value. If you’re yet to secure a loan, use this figure as your principal amount.
The loan term, expressed in months or years, defines how long you’ll be repaying the loan. Common loan terms range from 36 to 72 months. Convert the term to months if it’s not already.
To calculate your monthly interest rate, divide the annual interest rate by 12. For instance, if your annual rate is 5%, your monthly rate is approximately 0.42% (5 / 12).
The formula to calculate your monthly interest on a car loan is:
Interest Payment = Principal Amount × Monthly Interest Rate
For example, if your principal amount is $20,000, and the monthly interest rate is 0.42%, your monthly interest payment is:
$20,000 × 0.0042 ≈ $84
Multiply the monthly interest payment by the number of months in your loan term. If your loan term is 60 months, your total interest paid will be:
$84 × 60 = $5,040
To figure the total cost of the loan, add the principal amount to the total interest paid. In our example, it’s:
$20,000 + $5,040 = $25,040
To calculate your Annual Percentage Rate (APR), you need a more complex formula:
APR = (Total Loan Cost / Principal Amount) / Loan Term) × 1200
Using our example figures:
(25,040 / 20,000) / 60) × 1200 ≈ 5.04%
This is your APR.
Online auto loan interest rate calculators can simplify this process. Input your principal, interest rate, and loan term to get quick results.
Understanding how to calculate the interest rate on a car empowers Malibu shoppers during the car buying process. It lets you budget more accurately, compare offers, and make the right decisions about your auto loan in Santa Monica.
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