How to Calculate Interest on an Auto Loan

January 27, 2012

You need to calculate interest on an auto loan to determine how affordable your auto loan will be. You must have some knowledge of auto loan rates so you don't end up paying a fortune on interest. An inexpensive car might prove to be not so cheap if you have to pay an exorbitant rate of interest on your auto loan. This interest rate is termed as APR or annual percentage rate. By determining the APR, you can compare auto loans and evaluate it in terms of percentage. You can therefore shop for the cheapest auto loan with the lowest APR.

Calculating Interest on an Auto Loan:

  • In order to determine the affordability of an auto loan you must take into consideration the rate of interest, the APR, other charges and expenses such as sales tax, loan fees, destination charges, cash rebates, down payments and trade-in value of your used vehicle.
  • The primary concern should be the amount of the loan that the lending institute is giving you. This loan amount is known as the primary amount.
  • The credit score is another important consideration, as it helps to determine your creditworthiness, and affects the rates offered to you. The higher your credit score, the greater is your creditworthiness and the lower are the interest rates on the auto loan. Even a quarter percent decrease in the interest rate can translate into annual savings of several hundred dollars. Other factors that affect the APR are the size and term of the loan.
  • Lending institutes use a simple interest calculation to determine the monthly payments so the loan is paid off in the specified time. The monthly interest rate is calculated by dividing the APR by 12.
  • This amount is added to the monthly principal to arrive at the monthly payment.
  • You can do the calculations manually or you can take the assistance of an online interest rate calculator. If you use a calculator, you need to feed in the required data such as the principal amount, the rate of interest and the duration of the loan. You must also remember to add all additional charges, taxes and fees to the principal amount. Be sure to convert the term of the loan from years into months.
  • This will help you determine the total amount interest that's payable for the life of your auto loan. If you add this amount to the principal amount, you will arrive at the cost of the car, which will be higher than the selling price at which you bought it. You will therefore be able to determine if the loan is feasible or not.
  • You can also calculate the money you could save by making extra payments towards the principle amount. In this manner, you can compare several auto loans and determine which auto loan is in reality a cheaper one, even if the monthly payments don't reflect the same.

By calculating the interest on an auto loan, you can judge whether you have the financial capacity to meet the terms of the loan. You should also consider making a larger down payment to qualify for better rates of interest.

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