How Are Auto Loan Rates Calculated?

If you want to buy a new or pre-owned car but don’t have the money to pay in one go, then you can opt for what is called an auto loan. The amount of money that is provided by the bank for you to buy a vehicle is known as auto loan or car loan. These loans, just like others, are to be paid in installments and are secured by the value of the vehicle being purchased. 

According to studies, most Americans apply for auto loans as they don’t have enough money in hand to buy a new and quality car. In 2017, the average amount of money borrowed to purchase a new car, was close to $31,000, averaging a $515 monthly payment. And approximately $21,375 was borrowed for purchasing a used car with $398 a month installment. Banks are the top choice for car loans; they reported $368 billion in open car loans. 

The world of car loans is pretty overwhelming when you are a fresher. So it’s good to start understanding the basics of it. Understanding how a car loan works is the first step to getting a good deal on one. You can get one from a direct lender, or through the car dealership.

What affects your auto loan rates?

  • Loan Cost: There are two basic parts to the cost of a car loan: the principal (P) and the interest (r). The negotiated cost of the car is the principal itself. Interest refers to the total costs accrued over the life of the loan based on the principal & the stated interest rate.
  • Interest Rate: Interest rate is a basic rate charged to the borrower for the money loaned. The interest rate is a percentage for a one-year period and known as the Annual Percentage Rate (APR).
  • Down Payment: The down payment is an upfront amount of money which is paid in cash by the borrower at the time of the purchase of the vehicle. It is usually expressed in terms of a percentage of the total price. It is not a legal requirement, but is almost always required by the lender for security reasons.
  • Terms and Conditions: This refers to all of the other items that make up a car loan, including the term of the loan which is normally stated in number of months or years, loan payoff and resale terms, maintenance fees, insurance and registration fees, conditions regarding theft or accident, and conditions of loan default and repossession are just some to name. A borrower is advised to read and discuss the terms and conditions carefully and have a clear understanding of what they mean before signing on.

How is auto loan rate calculated?

A loan rate is calculated using the following formula:



A = monthly payment,

P = principal,

r = interest rate per month (annual interest rate divided by 12),

n = the total number of months.

You can substitute your values respectively to find out your loan payments. You can use this while budgeting for a car.