How to Calculate Annual Vehicle Interest

The interest rate that the lending bank or car dealership presents to you upon purchasing an automobile is a simple interest loan. While the interest does add to the total amount of your purchase, it does not compound, which adds to the complexity of the time value of money. Determining the amount of interest that you must pay each year can help with budgeting and deciding if it is beneficial to pay off you car early.

Instructions

1

Determine the principal amount of the loan at the beginning of the year for which you are calculating the amount of annual interest. The remaining amount can be found on the first car payment bill you receive for the year. You can also determine the amount by subtracting the principal you paid on the last car payment for the previous year from the amount of the loan remaining. This information is included in every bill from your auto loan lender.

2

Multiply the remaining principal by the interest rate on your loan and divide by 12 to determine your first interest payment. For example, if $25,000 remains on the loan and your interest rate is 4.2 percent, then your first interest payment for the year is $87.50 (($25,000 x .042)/12).

3

Subtract the interest payment from your total monthly car payment to produce the amount you are paying on your principal for that month. For example, in the above example, your car payment is approximately $462.67 per month. Subtracting $87.50 from this amount gives a total of $375.17 that you are paying toward your principal.

4

Reduce the total principal amount by this monthly contribution toward your principal. So, subtract the $375.17 from $25,000 to show that $24,624.83 still remains on the loan. This number is used to determine the subsequent monthly interest payment.

5

Repeat the first step using the new principal balance over the life of the loan. So, you multiply $24,624.83 by 4.2 percent and divide by 12 to give you an interest payment of $86.19 for the second month. You have now paid a total of $173.69 in interest for the first two months of the year.

6

Repeat or the remaining 10 months, until you have done so for all 12 months of the year. Add together all of the monthly interest payments for each of the 12 months to determine the total for the year. Therefore, in the example, the total interest for the first year would be $962.32.