How to Estimate Interest of an Auto Loan

Sometimes what seems like a good deal really is not. For example, you may have negotiated a good price for a new vehicle, but due to financing charges and interest, the true cost might be much higher than you thought. According to the Center for Responsible Lending, consumers will pay more than $25 billion in interest rate markups during the lives of their loans. Knowing how to estimate the interest that you will pay on your auto loan can prevent sticker shock.

Instructions

1

Determine the amount of money that you need to finance. This should be the total price of the auto, including taxes, less any down payment that you plan to pay.

2

Estimate your interest rate. To get an idea about what the interest rate might be, call your bank or search the Internet for car loans to determine a general range of what your interest rate might be. Remember that the higher your credit score, the lower your interest rate should be.

3

Decide on how long you want to pay on the loan. Typically, car loans are two to six years in length. Convert the amount of years into the number of payments. For example, if you have a three-year loan with monthly payments, convert that to 36.

4

Calculate your estimated payment. Assign the following variables: P = principal to be financed; r = interest rate; and n = total number of payments. Your payment is found using this formula: payment = P(r/12)/(1-(1+r/12)^n. 12 is the amount of monthly payments to be made in a year. For example, if you finance $15,000 with a three-year loan at 7 percent, your payment would be 15,000 (0.07/12)/1-(1+.07/12)^36 or $463.16.

5

Multiply your payment amount by the number of payment periods, then subtract the amount borrowed to calculate the entire amount of interest you will pay. Continuing with the example, multiply $463.16 by 36, then subtract $15,000 to find the total interest paid. That total is $1,673.76. To estimate the monthly interest paid, divide the principal borrowed by the amount of payments, then subtract that number from your monthly payment. In the example, divide $15,000 by 36 to get $416.67. Now subtract $416.67 from $463.16 ($46.49) to determine the monthly interest paid.