Blog : Auto Loan Tips & Car Finance Guides

in this article we're going to talk about how to calculate your car loan principal and interest to your total car loan payment now this came from a question on my other article on how to calculate your car loan payment or I showed you how I calculated my own car loan using one of my financial calculators now I'm going to go through in this article and break down those numbers so you can really understand how this is calculated because the question was actually pretty good because I got to imagine a lot of people are thinking this

How Car Loan Payments Are Calculated in the USA

Understand the basic formula behind your monthly car loan payment

now here are the numbers from that article it was a loan of twenty thousand dollars so it was a thirty thousand dollar car ten thousand dollar down payment we're financing twenty thousand dollars and it was a five year loan so that's going to be 60 months and it was at three percent now I know you're thinking three percent would be great today but that is what we used so I'm just gonna stick with that number of course you can use whatever number number when you do your own calculations and that total car loan payment is 359.37

now this number is going to be different if you go back and watch that article and that has to deal with whether you're making the payment at the beginning of the month or at the end of the month or you get the loan and then make it on the first of next month so that's how we're going to calculate it here so this number might be a little bit different than the previous number and I'm going to go ahead and make sure that we bring up our calculator just so I can also walk you through some of that math

now here's the first thing that we want to take a look at so I'm going to go ahead and put this board down actually for a second and we're going to go ahead up and bring the calculator up so it is up on the screen and I'm going to walk you through these numbers here so what we're going to use is this financial financial calculator you can get the link in that other article that I just mentioned and we're gonna do five years so five shift n and that's going to be 60 months so you see 60 at the very top you're going to see our three percent at the very top there as well and then you're gonna see our twenty thousand dollars which I already have I'm just punching them in again for you and it's right there under or above the present value so that's the PV is the present value the amount that you're taking out today is twenty thousand dollars and our future value because we're gonna have it all paid off at the end of that five years so it's going to be zero so then it's going to calculate our payment for us and that's going to be 359 and 37 cents so that's the amount that you're going to be paying each and every single month

Principal vs Interest in Auto Loans Explained

See how your payment shifts from interest to principal over time

now the question that we had was really about how is this calculated because wouldn't three percent again let's bring up the calculator wouldn't twenty thousand dollars times point zero three for three percent is six hundred dollars wouldn't my interest be six hundred dollars and the answer is no because each and every month a a part of this payment right here is going towards the principal or that twenty thousand dollars your principal is the amount that you're originally taking out in that loan and it will slowly decrease over time and so or increase the actual amount of this will increase towards that loan but this number is going to decrease each and every single month that means more and more is actually going towards the principle the amount that you're actually borrowing and less is going towards the interest payment each and every single month of this amount

so let's go ahead and break this out so all we need to do is take three percent so we're going to take our point zero three and we're going to divide that by 12 because we have 12 months in the year and that is going to be .003 let's get some uh more decimals in there so I'm going to go I believe it's shift equals four there we go so when we've got four decimals it's going to give us .0025 let's work in Reverse just so we can get this math .0025 if we add that up 12 times or multiply it by 12 times 12 that's our three percent so you see how that works three percent divided by 12 months divided by 12 months that's going to be our point zero zero two five so three percent will be point zero zero two five if we divide that by 12.

How Auto Loan Interest Is Calculated Monthly

Learn how APR turns into monthly interest on your car loan

so this is the number that we're going to be dealing with for month one so if we take that amount and we multiply it by our 20 000 dollars that is going to be fifty dollars so month one so I'll put just M1 month one is going to be fifty dollars is going to go towards our interest payment so we can take our 359 359.37 that's going to be or subtracting our fifty dollars from that that means 309.37 is going towards this twenty thousand dollars so what that means I have some of this math up here just so I can uh go through a little bit quicker so our twenty thousand dollars is going to be our so this is our interest right here and then we're gonna have our principal for month one and that's going to be our 309 and 37 cents so that means after month one twenty thousand dollars minus our three hundred and nine dollars and 37 cents is going to be nineteen thousand 690 690 and 63 cents

so this means that right after month one once we make that first payment we don't we no longer have a loan for twenty thousand dollars we now have a loan for nineteen thousand six hundred ninety dollars and sixty three cents

now in month two we're going to be making that same exact payment so what that's going to look like it's not going to be fifty dollars it's going to be a little bit less because again month one we had twenty thousand dollars but now our loan is actually smaller in month two it's now nineteen thousand six ninety sixty three so if we follow this same math for M2 or month two that math is going to be um or nineteen nineteen thousand 690 690 0.63 and we're going to multiply that by our 0.25 because month two is going to be the same thing multiply it by 0.0025 put my little point there and that's going to equal I've been math already done here that's going to equal 49.23 so 49.23 is now our month 2 interest payment so that's how we're going to calculate that and then that means again we're going to take our 359 37 because that's going to be the same payment each and every single month so we're going to subtract 359 we're going to subtract 49 23 from our 359 37. so we can subtract that out and that is going to give us 310 14 3 10.1 0.14 so that is going to equal our total amount so you can see it's 310 14 more go towards the principal than our previous month and so on and so forth

Total Interest Paid on a Car Loan Over Time

Understand how much interest you pay over the life of your loan

now it's actually pretty easy to calculate our total interest and here's how we can calculate that you don't need to go through every single calculation in order to figure this out and I'm going to go ahead and pull it up on the screen so here we go we got the calculator right up here so I have all of our math already done so all we need to do is we know that we're going to pay off the loan so we know that in in total all of our payments are going to equal or pay off that twenty thousand dollars so all we need to do is figure out the total payments and then subtract our original twenty thousand dollar loan so you already have it we already have it right here so it's that 359 so it's this number right here it's a 359.37 it's rounded so we're going to take that and we're going to multiply that by 60 months because that is the amount of payments we're going to be making so multiply that by 60 months that's going to be twenty one thousand five sixty two point four and if we round 0.43 so if we subtract our twenty thousand dollars this will actually be the amount of interest you pay over the life of the loan so if we went back and added up all of those interest payments and we did every every single month for 60 months that is the number that you're going to get for your total interest payments

Real Example of a Car Loan Payment Breakdown

A real-world example showing how monthly payments are calculated step by step

now of course there are other fees in financing a car but this is how you calculate a loan payment with your principal and your interest each and every single month so the total amount that you're paying stays fixed but the the difference between the interest and the principal will change so one will go down one will go up what will go up is the amount that's going towards the principal what will go down is the amount of Interest the net amount of interest that you're actually paying it's still going to be three percent but three percent of a smaller number each and every single month

so hopefully this has added some clarity to your car loan payment and helps you understand how this stuff works if you've enjoyed this article be sure to subscribe and we'll see you on the next one