Calculating car loan interest is a pretty straightforward process. It’s just a matter of multiplying together some numbers and adding them up, but if you want to figure it out the easy way, here’s how to do it:
Step 1: Find the interest rate
The first step in calculating your car loan interest rates is to find the average interest rate for a car loan. You can see what the average car loan interest rate is across all credit ratings, by state, by year and more.
“Your interest rate can have a big impact on how much money you pay over the life of a loan” so it’s crucial to know it exactly as per Lantern by SoFi experts.
Step 2: Find out the duration of the loan
Let’s say you’ve found a loan with an interest rate of 3%. The duration is how many months it will take for you to pay off your car loan. You need to divide the monthly payment by the monthly interest rate (0.03) to get the duration of this loan:
duration = 480/(0.03) = 1,200 months
This means that if you make payments every month at a rate of $480, your car will be paid off in more than 1,200 years (yes, centuries!). This number may sound daunting at first, but stick with them—it’ll show you how much easier it is if you just round up.
Step 3: Multiply the interest rate by the duration of the loan
The result of Step 2 is your interest rate. To find the monthly payment amount, multiply this percentage by the loan’s duration (in years). For example, say you have a car loan with an interest rate of 5% and a duration of 60 months (5 years). Your monthly payment would be: 0.05 x 60 = $30 per month.
Step 4: Divide that number by 100 to get the decimal figure
Divide the interest rate by 100 to figure out how much it is percent. For example, if the interest rate is 4.5%, divide it by 100 to get 0.045—the decimal figure that goes into your equation. If your interest rate was 9%, divide it by 100 to get 0.09—the decimal figure that goes into your equation.
Step 5: Multiply that decimal figure by your loan balance
Now that you have the monthly payment amount, it is time to multiply that decimal figure by your loan balance. Your loan balance is the total amount of money you borrowed from the dealer. The total cost of borrowing includes all monthly payments and interest charges over the life of your loan.
The final step in calculating car loan interests is multiplying this new figure by 360 (or, sometimes 365). This determines how long it will take for you to pay off your car with this particular monthly payment schedule.
Final step: It’s time to add your monthly payments to get your total cost of borrowing
With your monthly payments in hand, it’s time to calculate your total cost of borrowing. To do this, add up all of the interest you will pay over the life of your loan and then divide that by how long it will take you to repay it.
If you’re looking for a new car and need to know how much it will cost, this process is easy. It just takes a little time and some math knowledge. If you need help with any part of the process, don’t be afraid to ask someone who knows about loans and go ahead.
