Car Loan Calculation Formula

In any situation, it is always best to get ahead of the game. The same goes for when you are trying to get a car loan. Too often, people fall into the trap of thinking that the only thing they need to do is to fill out a form and the rest is taken care of. This is simply not the case. The sooner you start thinking about how you can improve your chances of getting the best deal possible, the better off you will be.

One of the most important things to do before taking out a car loan is to know how to calculate the amount of interest you will be paying. Knowing how the math works will not only help you get a better loan but will also prevent you from paying more than you should. In addition, it will give you a better understanding of how much money you can realistically borrow.

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Written by: Pig Daddy

Calculating Your Car Loan Payments


When it comes to calculating your car loan payments, there are three things that you need to take into consideration. These are principal amount (principal), interest rate (rate), and repayment term (term). 


Principal (P)

This is the amount of money that you are borrowing. In the case of a car loan, this is usually equivalent to the price of the car that you are purchasing, less any cash down payment that you are willing to pay. 


Rate (R)

The interest rate is the lender’s profit on your loan. Car loan interest rates are affected by a variety of factors. These include the amount of the loan that you are getting, the loan term, and the creditworthiness of the borrower. 


Term (T)

This is the length of time that you will be making your payments. In Canada, most lenders offer a minimum of 12 months and a maximum of 96 months. The longer the term, the lower the monthly payments, but the higher the interest rate.


Example of a Car Loan Interest Calculation


The formula for calculating the total interest on a car loan is as follows:

I = P x R x T

To demonstrate how the formula works, we will use an example. Let’s say that you are purchasing a new car for $40,000 with a loan term of 1 year and a 10% interest rate. 

$40,000 = P ; 10% = R ; 1 year = T

I = $40,000 x 0.10 x 1

I = $4,000

P + I = $44,000

Monthly Payment = $44,000 /12 = $3,666.67

If you are having a hard time understanding the math, you can actually use an online car loan calculator instead. It’s a fast and easy way to get an idea of how much you will be paying in monthly installments. 


Online Car Loan Payment Calculator


Most Canadian lending institutions provide a loan calculator that will help you to easily figure out what your monthly payments will be.

Here are some of the companies you can check out:

Frequently asked questions

Is it better to finance a car or buy it outright?

This is a common question that people ask. The short answer is that it depends on your financial situation. 

If you have a lot of disposable money and you can afford to buy a car in cash, go for it. However, if you are struggling financially, you might want to consider applying for a car loan. Financing your car will allow you to pay for it over a longer period of time, and will give you a little more breathing room in case you find yourself having to make a sudden expense.

Is it advisable to choose a longer repayment term?

Generally speaking, it is highly advisable to take a car loan with a shorter repayment term. While it is possible to stretch your monthly payments for a longer period of time, you will end up paying a lot more in interest if you decide to do so.

How do you know if the online car loan calculator is accurate?

You may check if the car loan calculator is accurate by comparing the result to your own manual calculation. If you are still unsure, you can always call the lending institution of your choice for a breakdown of the calculation.


Don’t let the fear of car loan interest rates stop you from buying your dream car. Knowing how to calculate the monthly payments of a car loan is a great way to make sure that you are making the best financial decision for your needs, and will give you added peace of mind in knowing that you are making a smart financial move. 


Pig Daddy

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