Car Buying

How to Calculate Car Loan Interest Rates: A Step-by-Step Guide

Looking to finance your new car? Learn how to calculate car loan interest rates with our step-by-step guide. Discover the factors that affect interest rates and get tips for reducing your rate.

Read time

6 minutes

Date

05.04.2023

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When receiving an auto loan, you will be charged a rate of interest which is usually determined based on your credit score, down payment amount and the length of your loan.


It's important to understand your car loan interest rate, as this can determine whether or not you can afford to buy a car. It’s also beneficial to know it as you can then work out a budget and figure out how much the auto loan is going to cost.

What is an interest rate? 

An interest rate indicates how expensive borrowing is or how lucrative saving is. Therefore, if you are a borrower, the interest rate is the sum you pay for borrowing money and is expressed as a percentage of the overall loan amount. For a loan of a certain size, the higher the percentage, the greater the amount you must repay.


There are two main types of interest: compound and simple. Compound interest is computed on both the original (principal) amount and the interest that has previously accrued on it, as opposed to simple interest, which is calculated on just the original (principal) amount.


Simple and compound interest differ in that simple interest just considers the original sum, but compound interest also accounts for interest on prior sums.

How is car loan interest determined?

Whoever the lender is, the interest rate is likely to be determined by using the same factors. That includes your credit score at the time of applying, as well as your household income and expenses.


There is also precomputed interest that is often used with those who apply with poor credit, or lower-income households. This just means that the lender will calculate the total interest that is to be paid over the loan term. It is then added to the monthly cost you’d pay for the actual loan itself.


Could a car subscription be for you? Check out cars available on 6-12 month terms.

How to calculate interest on car loan payments?

If you want to plan, then it's always a good idea to calculate the amount of interest you’ll be paying on a car loan each month. There are several ways you can do this: 

Online tools

There are a ton of useful guides, tools, and tips on the internet and some of the more useful tools are loan and interest calculators. Enter the amount you’re looking to borrow and a few basic details regarding your loan term. If you have an agreed interest rate with your lender already, you can enter that and calculate how much it will cost you throughout the loan.

Chat with your lender

One of the easiest ways to work out the total cost of a loan, with interest included, is to speak to a few lenders. It might be that you can get a slightly lower interest rate with a different provider. It is worth noting that this isn’t likely to be a drastic change, as interest is often calculated based on your income and credit score, but a percentage or so can make all the difference in the long run.

Do your own simple calculation 

To show you how to calculate the amount of interest you’ll be paying, we’ve created an example of how this would look.


If the price of a car is $40,000, and you paid a 10% deposit or downpayment, with an interest rate of 12.84% spread over 72 months (this is the average for new car buyers) then the total amount of interest you pay is $15,813.45.


This means the total amount repaid is $51,813.45 – which might seem like a lot, but it is spread out over the course of your loan term.

What factors determine car loan interest rates?

To make sure you’re in the best position before applying for an auto loan, there are a few things you can do to try and score the best deal.


Check your credit score – This is the big one. The better your credit score is, the better your loan interest payments will be, as there is less risk involved for the lender. You ideally need to have a credit score of at least 700 to buy a car with an auto loan, although you might be able to find a deal if your score is slightly lower.


Experian’s report on the State of the Automotive Finance Market Q2 2022 estimates that the average person buying a new car with excellent credit is likely to have an interest rate of 2.96%. Those with poor credit paid significantly more, with the average being 12.84%.


Length of the loan – The longer the term of the loan, the more interest you’re going to pay. That’s because you are borrowing the money for a longer period, thus paying it back in smaller monthly amounts. To save money, see if you can pay off your car loan faster, increase your monthly payments and reduce the overall interest on the loan.


Pay a larger down payment – If possible, see if you can pay a larger amount at the beginning of the loan term, also known as a down payment. If you can afford to pay a larger amount, the overall amount you borrow will be less, resulting in lower interest payments. 


Try to get pre-approved – A preapproved auto loan is a loan that borrowers can secure before buying a car. This signals to the dealer that you are prepared to make a purchase and might occasionally provide you leverage when negotiating price and finance. 


This should leave you in a better position to negotiate a better interest rate. But do remember that preapproval does not guarantee anything, the lender will still need to run a hard credit check to ensure your eligibility.

4 ways to save money on car loan interest 

There are ways you can look to save some money in the long term, but it might mean being patient or saving extra money before committing to a purchase.

1. Look for a better deal

This might not always work, as you may already have the best deal you can get. But never take the first quote. Always shop around and see if you can find a better deal. Going in with a preapproval is wise, as this allows you to negotiate directly with dealerships.


If you have a strong credit score, this is even more vital. The first interest rate you see is likely to be the starting rate, and you easily try and work this number down to save some money.

2. Don’t rush to purchase

Once you’ve started inquiring about buying a car, it's hard to stop the process dead in its tracks and walk away. Dealers will try and lure you in. But sometimes, taking a step back and assessing the situation can save you a few dollars.


It might be that you can save and pay a larger amount on the down payment, thus saving you a ton in interest fees. It also gives you time to work on your credit score, and to make sure everything on your credit report is accurate and updated.

3. Make one-off payments

If you do proceed to purchase and drive away in your new car, it can be wise to make one-off payments or even slightly increased monthly payments to offset some of the interest. You should always check with your lender to make sure this is okay to do.

4. Avoid costly add-ons

Dealers are likely to try and get you to add on all sorts of extras to your new vehicle. Whether it be phone support, GPS, etc. Some of these may appeal to you, but it's always worth asking yourself, do I need this? The extras will add to the value of the car, which means you’ll end up paying more as a result.

How can you avoid paying high interest altogether?

If all of this sounds a bit complex, then consider trying a car subscription service like FINN.


Avoid the hassle of getting your hands on a new car with a subscription-based model. This means you just need to choose a new car and everything is taken care of for you. There won’t be any interest rates to calculate, you just pay one monthly fee that also includes insurance, maintenance and roadside assistance. 


Just choose your car, enter some basic details to run a credit check (this won’t affect your credit score) and get approved in minutes.

Final thoughts

You should now be in a better position to negotiate your car loan interest rate. Never rush into buying a car, as there are likely to be hidden costs along the way.


Consider saving up for a larger down payment, or taking time to improve your credit score. But if it is time, shop around for the best deal possible, and try to get preapproved so have the upper hand when haggling with dealerships.


For a hassle-free alternative, consider a FINN car subscription where you make one simple monthly payment to cover everything. No interest rates, no hassle.

How a FINN Car Subscription Works

1. Choose your perfect car

Pick your next car and select the term and mileage package that’s right for you.


2. Get approved in a few clicks

Submit your information and get approved in under five minutes.


3. Delivery straight to your home

Schedule for FINN to deliver your new car so you can focus on the road ahead. 


4. Just hit the road and swap when you’re done

All that’s left to do is drive. When your term is over, you can return the car and pick out something new, or simply walk away.

How a FINN Car Subscription Works
How a FINN Car Subscription Works

How a FINN Car Subscription Works

1. Choose your perfect car

Pick your next car and select the term and mileage package that’s right for you.


2. Get approved in a few clicks

Submit your information and get approved in under five minutes.


3. Delivery straight to your home

Schedule for FINN to deliver your new car so you can focus on the road ahead. 


4. Just hit the road and swap when you’re done

All that’s left to do is drive. When your term is over, you can return the car and pick out something new, or simply walk away.