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How to Calculate Interest Rate on a Car Loan

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Setting a budget is especially important when buying a used car and learning how to calculate auto loan interest is crucial. Lucky for you and other Nashville drivers, here at Music City Autoplex, we have put together a helpful guide to teach you how to figure interest on a car loan. 

What is an Interest Rate?

The first step in learning how to calculate auto loan interest is to understand exactly what interest means. If you purchase your vehicle through a credit line, the lender technically owns your car. The interest rate is essentially the fee you pay for borrowing their money and can be impacted by:

  • Principal Amount: The total amount you want to borrow to purchase your vehicle.
  • Loan Term: With a shorter term, you’ll make higher monthly payments but save money on interest. Longer terms can be more affordable but you’ll end up paying more in interest. A good interest rate depends on your credit score and whether you prefer a short- or long-term loan.
  • Repayment Schedule: When learning how to figure interest on a car loan, you’ll want to set your repayment schedule. Typically, payments are made monthly.
  • Repayment Amount: The amount you pay each month will help to reduce what you owe on the principal and part of it’ll go towards interest.

How to Calculate Interest Rate on a Car Loan: First Payment 

You can learn how to calculate interest on a car for your first payment by following this formula:

  1. Divide your interest rate by the number of payments you will make per year.
  2. Multiply that number by your loan balance, which will be the entire loan amount for the first payment.

How to Calculate Interest Rate on a Car Loan: Moving Forward

As you continue to make payments on your vehicle, you’ll use the following formula to determine your interest moving forward:

  1. Subtract the interest from your latest payment to find out what your principal balance is.
  2. Subtract this total from your original principal to find your new balance.

You can speak directly with our finance department if you have more questions on how to figure interest on a car loan. 

Learn More About How to Calculate Auto Loan Interest in Madison

If figuring out your car loan interest is intimidating or if you have other questions like, “How does auto financing work,” contact us today! Our team can help you cruise through your commute from Hendersonville to Clarksville more confidently after helping you learn how to calculate interest rate on a car!

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