How Does Auto Loan Interest Get Calculated?
When you are looking for a car loan, it is very important to shop around. Many banks and credit unions can offer you different loan terms. The most important variance between loans is often the interest rate of your loan. Many different factors contribute to the loan rate that you are offered.
Educate Yourself About the Loan Process
Some purchasers may not realize the total price that they are paying for their car. They may see a sticker price of $15,000 and believe that they are paying $15,000 for their vehicle. When you finance your vehicle, your total purchase price is the amount of your loan, plus interest. It is important that you calculate the amount of interest you will be paying so that you know the final purchase price of your loan.
Know the Terms of Your Loan
There are a few key factors that you must know in order to fully understand the terms of your loan. The first is the principal amount of the loan. This is the amount that you borrow from the bank. The principal is often the purchase price of your vehicle, minus the amount that you contribute for a down payment. In our example, if you purchase a vehicle for $15,000 and put $3,000 for a down payment, you will have a loan principal of $12,000.
The second factor that you must know is your loan interest rate. This is sometimes known as a loan percentage, as well. You can find this information by contacting your financing company or reviewing the loan documents. For our example, let's use an interest rate of 5%.
The final term that you need to know is the length of your loan. Vehicles can be financed for as many as 72 months. Review your loan documents to determine the length of your loan. For our example, we will use a term of 60 months. We will convert 60 months to a term of 5 years for our calculation.
Calculate Your Interest Payments
For an auto loan, the interest is equal to the principal loan amount, multiplied by the interest rate, multiplied by the term of the loan. For our example, you would multiply 12,000 by .05 by 5, to calculate a total interest payment of $3,000. Add that $3,000 to the original purchase price of $15,000 and you will be paying a total of $18,000 for your new vehicle.