How to Calculate Auto Loan Interest?
Paying for a car using a loan means receiving a lump sum of money from the lender, and then paying it back, with interest added, over a set period of time. The monthly amount you pay back depends on several factors: the amount borrowed, the number of installments and the interest rate.
Typically, car loans are calculated using simple interest, meaning the interest is charged only on the amount owed on a loan. This way it saves money to the borrower, as opposed to compound interest. Amortization is used when paying car loans, that is more interest is paid at the beginning of the term than toward the end.
Here is an example of a monthly payment calculation for a loan of $20,000, paid over a period of 48 months with an interest rate of 8%. If you calculate it using our car finance calculator you can see the monthly payment would be $488.
Alternatively, you can calculate it yourself using the below formula. The result for this calculation or any other combination of loan, interest rate, principal and number of the month will be identical if you calculate it manually or if you use our car loan calculator below.
Car finance calculator
EXPLANATION
Below is a detailed explanation of the factors that determine how much you will pay monthly, and the overall payment at the end of the term.
- Amount – the amount can equal, be higher or be lower than the value of the car. It will be higher than the value of the car because of the added interest if you do not pay a down payment. It can be equal or lower than the value of the car if you are making a down payment, or if you are trading in another car.
- Term – this is the number of months you have to pay the loan back. Usually, it ranges between 24 and 72 months.
- The annual percentage rate. Usually referred to as the APR, this is the effectiveinterest rate you pay on your loan.
Frequently Asked Questions
Is loan approval determined by my credit score?
Credit score is one of the factors for approving financing but other considerations are taken into account as well, such as your income, job, assets and possible costs. At Car-Finance, our mission statement is to help clients with a bad credit score as well. Your credit score will not prevent you from receiving financing.
What do you need to approve my car financing application?
Simply go to our website and fill out the application form. we will then brainstorm the best solution for your needs and contact you to complete the application. The process is very simple and straightforward, with an additional required step to follow if your credit score is bad. Alternatively, you are welcome to call us or leave your phone number and we will walk through the steps over the phone. Overall, your application should typically be approved within a day.
Do I enter a contract by completing my car finance application?
No, you are not obligated to anything and are not entering a binding contract by filling out a form and by getting pre-approved by us.
Why is the interest rate for used car loans higher than the rates for new car loans?
It is important to note that financing for used cars carries a higher risk for the lender compared to financing new cars. This is because the risk for a breakdown is higher for used cars, which in turn affects its resale value and pay off. Additionally, used cars are typically financed by buyers who have a lower credit score and who are in a relatively riskier financial position.
How can I lower my interest rate?
You have several options to lower the financing rate as well as the number of monthly payments:
- Paying a down payment the day of your purchase
- Trade in your old car and use this payment for a down payment
- Choose a loan with a shorter duration
- Purchase a used car for a lower price
- Ask a relative or a friend to co-sign the loan with you, provided they have a better credit score