How to Calculate Interest Rate on a Car Loan

Man typing on calculator

When you’re setting a budget as you look for that new or pre-owned Volkswagen, learning how to calculate auto loan interest is an essential step. Depending on your credit and other financial information, you’ll likely have a number of options. It’s important to consider a number of factors while you shop around Vineland, so the financial experts at Volkswagen of Salem County have put together a quick guide to help you understand how to calculate an interest rate on a car loan. 

An Introduction to Interest Rates

First, a quick look into the function and purpose of interest rates is important to your auto financing journey. When you purchase a vehicle with a credit line, it is technically your lender that owns your car until you finish repaying the loan. An interest rate effectively compensates the lender for incurring risk on the loan they provide you. Below is a quick overview the terms you should familiarize yourself with when you’re wondering how to figure interest on a car loan:

  • Repayment Schedule: A repayment schedule, typically monthly, will help you pay off your loan in a timely manner.
  • Repayment Amount: What you pay each month, a percentage of the principal amount combined with interest, will over time cover the original amount you borrowed.
  • Principal Amount: This is the amount you borrowed originally to purchase your vehicle. Lower this amount by taking advantage of vehicle specials at your dealership.
  • Loan Term: A shorter term means you’ll pay your loan off faster, which also means you’ll accrue less interest. While a longer term is more affordable because the monthly payment will be lower, you’ll end up paying more in the end. Depending on your ends, you’ll want to consider both and how they’ll affect your interest rate.

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

The amount of interest you’re compensating for on your first payment can be determined with a couple short operations:

  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: Future Payments

To determine your interest on later payments, it can seem a little trickier, but our finance department specialists have made it simple:

  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.

Volkswagen of Salem County, Your Local Loan Experts in Monroeville

Whether you’re wondering how to calculate the interest rate on an auto loan or looking to value your trade, your Monroeville finance experts have you covered. From your Millville commutes to Washington Township and beyond, the Volkswagen of Salem County team can help you shop confidently and expertly for your next dream vehicle. Stop by today or contact us for all your financing questions.

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