How to Calculate Auto Loan Rates

by Steve Gross

Following the steps below will allow you to figure the interest rate on a simple auto loan. To do this, you will need to know how much you borrowed and how much interest you will pay. A simple loan means you pay the total interest without regard to the time it takes to repay it. These kinds of loans usually take place between individuals rather than between a bank and an individual. For example, you borrow \$4,500 from a friend to buy a car and agree to repay \$5,000, and you are curious to find out the interest rate. You can use this skill when you borrow money and you and the lender agree on the amount of interest but not the rate, or when you loan someone money, know how much interest you want and need to calculate the interest rate you will have to charge to get it. Computing a simple auto loan interest rate is not difficult. You need know only how to add, subtract and do long division. You can do the problems on calculator (recommended) or by hand.

The Car Loan Rate Formula

Write down the amount you borrowed at the top left of the paper and label it "principal." For example, "principal = \$4,500."

Write the amount of interest you will pay for the loan on the top right of the page and label it "total interest." For example, "total interest = \$500."

Write this formula in the middle of your page: "Interest rate % = total interest \$ / (slash means divided by) principal \$."

Rewrite the formula under the equation you just wrote, substituting the numbers you have written at the top of your page for "principal" and "total interest." For example, "Interest rate % = \$500 / \$4,500."

Divide the principal into the interest. Write the answer down as a complete formula. For example, "0.11 = \$500 / \$4,500."

Convert the fraction to a percentage by moving the decimal place two numbers to the right. Drop the zeros that now precede the decimal point and add a percentage symbol (for example, "0.11 = \$500 / \$4,500" becomes "interest rate = 11% = \$500 / \$4,500"). Write the new formula at the bottom of your formula list. You have computed the loan's interest rate, and you created a paper trail showing how you did it.

Tip

• check If you do not have a calculator, you can do the math on the paper. You will always divide the smaller number by the larger. If your result is a whole number instead of a fraction (all the numbers to the right of the decimal point), you have divided the smaller into the larger. Reverse yourself and do it again. If there are still numbers to the right of the decimal place after you've converted the fraction to a percentage, you can round up or down. For example, 11.256972 percent rounds to 11 or 11.3 percent. When you know the amount of any two of the three values, you can find the third by shifting the equation around and following the steps outlined above. To find the total interest, use "total interest = interest rate (expressed as a fraction) multiplied by the principal." To find principal, use the formula "principal = (total interest multiplied by 100) divided by the rate."