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## How is Auto Interest calculated? Regular Contributor

## How is Auto Interest calculated?

This may seem like a very noob question.. But i just need to make sure

i understand this before i go to the dealership tomorrow...

For example sake...

Lets just say your interest rate is 3%

How is the auto loan calculated?

Is it 3% of every single monthly  payment you make?

Message 1 of 30
29 REPLIES 29 Established Contributor

## Re: How is Auto Interest calculated?

in short, no.

The formula to calculate the payment is as follows: where

• A = payment Amount per period
• P = initial Principal (loan amount)
• r = interest rate per period
• n = total number of payments or periods

So let's say you finance 15,000 for 48 months at 2.5%.  Your payment is \$328.71.  So (15,000 * .025)/360 * 31 = 32.29.  So of your first payment 295.71 goes to principal and 32.29 goest to interest leaving you a principal balance of \$14,704.29.  Next month the calculation is (\$14,704.29 *.025)/360 *30 = 30.64.  So 298.08 goes to principal and so on for a total of 48 payments.  You can download from multiple sites an amortization schedule or use excel.  By the way, the 360 is a holdover from an earlier era when these calcs were done by hand. Some banks are using a 365 day year, but many still use 360.

Message 2 of 30 Senior Contributor

## Re: How is Auto Interest calculated?

@coterotie wrote:

in short no.

The formula to calculate the payment is as follows: where

• A = payment Amount per period
• P = initial Principal (loan amount)
• r = interest rate per period
• n = total number of payments or periods

So let's say you finance 15,000 for 48 months at 2.5%.  Your payment is \$328.71.  So (15,000 * .025)/360 * 31 = 32.29.  So of your first payment 295.71 goes to principal and 32.29 goest to interest leaving you a principal balance of \$14,704.29.  Next month the calculation is (\$14,704.29 *.025)/360 *30 = 30.64.  So 298.08 goes to principal and so on for a total of 48 payments.  You can download from multiple sites an amortization schedule or use excel.  By the way, the 360 is a holdover from an earlier era when these calcs were done by hand. Some banks are using a 365 day year, but many still use 360.

**********

At least today most every lender uses simple interest (not sure about repo-buy-here-pay-dear lots) rather than the rule of 78's "rule of 78 - sum-of-the-digits method" which was pretty much universal not so long ago. To save you - that don't know - the interest was front loaded on these loans and cost the borrower dearly ANd most had a pre-payment charge if you paid the loan early.

Ahhhh, the good old days....

Edit: Link for those of you that might be interested in the rule of 78 http://www.bankrate.com/brm/news/auto/20010827a.asp

Message 3 of 30 Regular Contributor

## Re: How is Auto Interest calculated?

@coterotie wrote:

in short no.

The formula to calculate the payment is as follows: where

• A = payment Amount per period
• P = initial Principal (loan amount)
• r = interest rate per period
• n = total number of payments or periods

So let's say you finance 15,000 for 48 months at 2.5%.  Your payment is \$328.71.  So (15,000 * .025)/360 * 31 = 32.29.  So of your first payment 295.71 goes to principal and 32.29 goest to interest leaving you a principal balance of \$14,704.29.  Next month the calculation is (\$14,704.29 *.025)/360 *30 = 30.64.  So 298.08 goes to principal and so on for a total of 48 payments.  You can download from multiple sites an amortization schedule or use excel.  By the way, the 360 is a holdover from an earlier era when these calcs were done by hand. Some banks are using a 365 day year, but many still use 360.

@mikemsceo wrote:

This may seem like a very noob question.. But i just need to make sure

i understand this before i go to the dealership tomorrow...

For example sake...

Lets just say your interest rate is 3%

How is the auto loan calculated?

Is it 3% of every single monthly  payment you make?

Haha.. that is why i asked.. i never learned really how it is calculated. Thanks!

Message 4 of 30 Regular Contributor

## Re: How is Auto Interest calculated?

Stating a 3% APR is easier to understand than a daily 0.000082191% (365-days) or 0.000083333% (360-days) rate.  This is, as a poster stated, because institutions use either 365 or 360 days to calculate interest.

To make interest calculations easy, divide the APR by 12 (number of months) to find the monthly rate (remember to convert % to decimal first)... 0.03/12 = 0.0025

1.  Multiply the monthly rate with the loan balance to find the interest charge for that month... 0.0025 x \$10,000 = \$25.

2.  Subtract \$25 from \$100 to find the amount applied towards the loan balance... \$100 - \$25 = \$75

3.  Subtract \$75 from the loan balance to figure the new loan balance... \$10,000 - \$75 = \$9,925

Repeat steps 1, 2, and 3.  The decrease in monthly interest charge directly equates to increases in principal payments until the loan is paid off.

Message 5 of 30 Regular Contributor

## Re: How is Auto Interest calculated?

@Hoya08 wrote:

Stating a 3% APR is easier to understand than a daily 0.000082191% (365-days) or 0.000083333% (360-days) rate.  This is, as a poster stated, because institutions use either 365 or 360 days to calculate interest.

To make interest calculations easy, divide the APR by 12 (number of months) to find the monthly rate (remember to convert % to decimal first)... 0.03/12 = 0.0025

1.  Multiply the monthly rate with the loan balance to find the interest charge for that month... 0.0025 x \$10,000 = \$25.

2.  Subtract \$25 from \$100 to find the amount applied towards the loan balance... \$100 - \$25 = \$75

3.  Subtract \$75 from the loan balance to figure the new loan balance... \$10,000 - \$75 = \$9,925

Repeat steps 1, 2, and 3.  The decrease in monthly interest charge directly equates to increases in principal payments until the loan is paid off.

Thanks for that!!

I guess my next question is....

how is the monthly payment calculated???

Is it...

Car Cost \$ 5000

My down Payment: \$ 500

Remaining Balance: \$ 4500 /36 year term

\$125 for 36 months???

Message 6 of 30 Established Contributor

## Re: How is Auto Interest calculated?

Well you could use the formula which would look something like this:

P = 4,500

R= 3%

N = 36 Or you could use the handy dandy calulator available here:

http://www.bankrate.com/calculators/auto/auto-loan-calculator.aspx

Which gives you a payment of 130.87/month for 36 months.

@mikemsceo wrote:

@Hoya08 wrote:

Stating a 3% APR is easier to understand than a daily 0.000082191% (365-days) or 0.000083333% (360-days) rate.  This is, as a poster stated, because institutions use either 365 or 360 days to calculate interest.

To make interest calculations easy, divide the APR by 12 (number of months) to find the monthly rate (remember to convert % to decimal first)... 0.03/12 = 0.0025

1.  Multiply the monthly rate with the loan balance to find the interest charge for that month... 0.0025 x \$10,000 = \$25.

2.  Subtract \$25 from \$100 to find the amount applied towards the loan balance... \$100 - \$25 = \$75

3.  Subtract \$75 from the loan balance to figure the new loan balance... \$10,000 - \$75 = \$9,925

Repeat steps 1, 2, and 3.  The decrease in monthly interest charge directly equates to increases in principal payments until the loan is paid off.

Thanks for that!!

I guess my next question is....

how is the monthly payment calculated???

Is it...

Car Cost \$ 5000

My down Payment: \$ 500

Remaining Balance: \$ 4500 /36 year term

\$125 for 36 months???

Message 7 of 30 Regular Contributor

## Re: How is Auto Interest calculated?

Although online calculators are correct, I do my own calcuations.

The formula that's been posted throughout this thread is correct.  However, I use Excel (doesn't matter if on a Mac or PC) which handles all the math.  Using your example:

Price of: \$5000

Down payment of: \$500

Loan term of: 36 months

Interest Rate of: 3%

The formula in Excel is =PMT(rate, nper, pv, (fv), (type))

In the simplest terms without getting into technicalities:

PMT is the monthly payment you're tyring to figure

rate is the Interest Rate in decimal form

nper is the Loan Term

pv is the TOTAL loan amount you are requesting

fv is not necessary for this example

type is not necessary for this example

PMT = ?

rate = 0.03/12 (divide by 12 since the interest is compounded monthly - it's daily, but it's easier to work in months and because the loan term is in months)

nper = 36

pv = \$4,500 (\$5,000 - \$500 = \$4,500, this is the TOTAL loan you are requesting)

So.... in the Excel cell, you enter

=PMT(0.03/12, 36, \$4,500)

The returned number is -130.87 or (130.87) depending on your cell format.

* You will receive a negative number.  To avoid minute detail discussions and explanations, don't worry too much about the negative number since it depends on how you utilize or interpret it with other numbers.  Just realize that it's the monthly payment (principal and interest).

** This formula is the same to calculate mortgage payments and a sleuth of other financial questions as long as you understand the what you're doing Message 8 of 30 Regular Contributor

## Re: How is Auto Interest calculated?

Hmmmm

Is it compound interest or simply interest off the principal loan ?

Inactually made a spreadsheet on excel with the formula you gave me

If anybody needs I can upload it ...

Message 9 of 30 Regular Contributor

## Re: How is Auto Interest calculated?

@Hoya08 wrote:

Although online calculators are correct, I do my own calcuations.

The formula that's been posted throughout this thread is correct.  However, I use Excel (doesn't matter if on a Mac or PC) which handles all the math.  Using your example:

Price of: \$5000

Down payment of: \$500

Loan term of: 36 months

Interest Rate of: 3%

The formula in Excel is =PMT(rate, nper, pv, (fv), (type))

In the simplest terms without getting into technicalities:

PMT is the monthly payment you're tyring to figure

rate is the Interest Rate in decimal form

nper is the Loan Term

pv is the TOTAL loan amount you are requesting

fv is not necessary for this example

type is not necessary for this example

PMT = ?

rate = 0.03/12 (divide by 12 since the interest is compounded monthly - it's daily, but it's easier to work in months and because the loan term is in months)

nper = 36

pv = \$4,500 (\$5,000 - \$500 = \$4,500, this is the TOTAL loan you are requesting)

So.... in the Excel cell, you enter

=PMT(0.03/12, 36, \$4,500)

The returned number is -130.87 or (130.87) depending on your cell format.

* You will receive a negative number.  To avoid minute detail discussions and explanations, don't worry too much about the negative number since it depends on how you utilize or interpret it with other numbers.  Just realize that it's the monthly payment (principal and interest).

** This formula is the same to calculate mortgage payments and a sleuth of other financial questions as long as you understand the what you're doing Yes!!!! I got something very similar to that! With those exact numbers!  Ecxept im using a more realistic 12% for me which is probably what they're going to offer.

I guess paying towards the principal is the best way to cut down interest tremendously withnsuch a high interest rate

Message 10 of 30
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