How do I Calculate Car Loan Payments & Interest Rate?

by Sara Huter, Demand Media
    Determine your monthly payment and interest by learning a few key pieces of information.

    Determine your monthly payment and interest by learning a few key pieces of information.

    Determining how much you’ll pay each month for your car loan depends on knowing four things: the total price of the car, including sales tax and upgrades; the interest rate; the down payment amount; and the loan term. You can calculate the interest by creating an amortization schedule.

    Step 1

    Calculate the total price of the car you want. Features such as anti-lock brakes, heated seats or a navigation system are available for most cars, but are not standard. Your dealer will give you a price list of the options available for your car. You’ll also need to add in sales tax to the price of the car. In most states, sales tax averages around 6 to 7 percent.

    Step 2

    Calculate the total price of the loan. Once you know the total price of the car, subtract the amount you will pay for a down payment. For most dealers, a down payment is optional, but making one is recommended. Pay as much as you can to reduce your monthly payments, and ultimately, the amount of interest you’ll pay.

    Step 3

    Choose the term of your loan. Auto loans can last from 36 to 72 months. The longer the term, the lower the monthly payment but the higher the interest rate. While you can always pay your loan off early, you may pay more in interest if you select a longer-term loan. Choose the term that you can afford without stretching yourself too thin.

    Step 4

    Obtain copies of your credit report, along with your credit scores and what interest rate you’ll qualify for (see Resources). You won’t know the actual rate until you sit down with a banker or auto dealer, but this will give you a good idea of where to start. The best way to know for sure is to get prequalified with a lender. This way, you’ll know the exact interest rate you’ll pay before committing to a loan. To get prequalified, visit a bank and explain that you’d like to buy a car and would like prequalification paperwork.

    Step 5

    Calculate the monthly payment and total interest (see Resources for an auto loan calculator). Enter the information you’ve determined from above. You can modify the term to determine the monthly payment you can live with. Once you've done so, you can calculate the interest by clicking on the “Show amortization schedule” button. The fifth column accumulates the interest you’ll pay over the life of the loan.

    About the Author

    Sara Huter is a professor of economics. Her background also includes risk management in the banking and energy industries with expertise in credit scores. Huter received an M.B.A. in finance from Texas A&M University and a B.S. in information systems from Kansas State University. She has been writing for over five years with work at Popsyndicate.com, WickedWordSmith.com and Simplejoy.com.

    Photo Credits

    • Jupiterimages/Comstock/Getty Images