How Do Car Loan Repayment Calculators Determine Interest Rates

Car loan repayment calculators image 1Finding a great loan program can begin with any one of the online calculators that exist. These calculators will help consumers figure out the monthly payment amount based on the figures plugged into the calculator. Most simple calculators ask prospective borrowers for information related to the principal amount, the interest rate, and the length of the term.

While these calculators can spit out a monthly payment amount making it easy for consumers to figure out how to budget for a loan, they do not always give them a picture of how these figures are derived, especially when talking about the interest rate. Go to any car loan repayment calculator, and you might find a space for an interest rate. However, the consumer has to come up with the interest rate but without this number figuring out the payment amount can be difficult – but not impossible.

Let’s take a closer look at how these calculators can be used to determine interest rates.

Pre-Set Interest Rates

Many online calculators already have a pre-set interest rate plugged into the calculator. Depending on the site, this figure might be derived from the rates established by the market and the financing institution. Conversely, this figure can be one that is derived from a sampling of interest rates. Either way, these online calculators typically only allow the consumer to plug in information related to the principal, rate, and time to calculate a payment amount, which can be very limiting.

Calculation Formulas

Many calculators that figure out all parts of the problem allow consumers to plug in the information they have to retrieve the figure they need. There are many ways to figure out car interest on a calculator, and depending on the type of interest being derived, some calculators will figure for simple interest. The simple A= P x R x T where A= Final Amount, P=Principal Balance, R=Interest Rate and T=Time is a common one, but it does not quite accurately figure for interest.

For example, a car that costs $21,000, a principal balance of $19,000, and a loan term for 60 months would generate an approximate interest rate when plugged into the above formula. With A= $21,000, P=$19,000, and T= 60 months (5 years), would be calculated as:

21,000=19,000 x (60) x R

21,000=114000R

21000/1140000=1140000R/1140000

.0184=R

The above figure, when multiplied by 100, would generate your interest rate, in this case, 1.84%.

While simple interest is great for your bank balance, they do not really give an accurate approximation of how much interest is paid on a car loan. Another method involves using the natural logarithm e, which equals approximately 2.72. The formula uses the same variables as simple interest but is written as follows: A=Pert, where A= Final Amount, R= Rate where the rate=5 years (60 months), and T= Time. To calculate interest using the above figures, the calculator plugs in the following figures into the formula:

21,000 = 19,000 x e(5)R

21,000=19,000 e(5)R

21,0000/19,000 = (19,000 e(5)R)/19,000

1.1053= e(5)R

Then take the log of both sides.

ln (1.1053) = ln e(5)R    (lne = 1, so it eliminates the exponent)

ln (1.1053) = 5R

ln (1.1053)/5 = 5R/5

.0200=R

You can repeat the last step in calculating for simple interest by multiplying the .0200 by 100 to get your interest rate, which in this case is approximately 2%. When using online calculators, you might get a variety of tools calculating interest in different ways.

Finding Your Interest

These are just a few ways that online car calculators might figure interest. In addition to your financial institutions that can generate a figure based on the market, consumers can find a number of online calculators that can give you an estimation based on the information you provide. The best thing about these calculators is that they reduce in many cases to seconds what it would take the average consumer quite a bit of time to furnish.

When talking about ways to borrow money to purchase a car, we use the term Auto Financing.