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How is the monthly interest rate calculated for a car loan?
I know with car loans you have to pay an interest rate on top of how much you borrow. But how is that interest rate calculated each month?
Lauren Smith · Updated on
Reviewed by Shannon Martin, Licensed Insurance Agent.
You are correct; the interest rate is an additional payment on top of the total loan amount. Your loan might have two types of interest: simple or precomputed. The monthly interest rate calculation changes depending on your interest type.
Let’s say you have a simple interest
car loan
with an interest rate of 6% and still owe $10,000.
You can calculate the monthly payments of your simple interest by taking:- Your interest rate percentage
- Multiplying it by the remainder of your loan
- Dividing it by the days in a year
- Multiplying it by the days in a month
Let’s use that example and go with a non-leap year in February.
- 0.06 times 10,000 equals 600
- 600 divided by 365 equals 1.64 (this is how much in interest you’re paying per day)
- 1.64 times 28 equals 46
So in February, you’ll be paying $46 in simple interest.
Precomputed interest is determined when you take out your loan and is calculated by taking the principal (how much you owe) and adding the precomputed interest amount to that number.
To calculate your monthly payment using precomputed interest, take the total loan amount plus interest and divide by the
months in your term length
. If you have questions about your precomputed interest, talk to your lender.
Your interest rate can drain your finances, but it doesn’t always have to stay the same. The best way to change your interest rate is by refinancing your car loan. You can do this with the
Jerry
app. Jerry will compare different lenders to help you find a better deal. On average, car owners pay $85 less every month after refinancing.View full answer
- Gregory R.
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