You can manually calculate the interest on a car loan using the amortization formula, which determines the interest and principal portion of each monthly payment. The core concept is that in the early stages of the loan, a larger portion of your payment goes toward interest. The formula to find the monthly interest amount for a specific period is: Outstanding Loan Balance x (Annual Interest Rate / 12).
Let's break it down with a real example. Suppose you have a $25,000 car loan with a 5% annual percentage rate (APR) and a 60-month (5-year) term.
- Calculate Monthly Payment: First, you need to know your total monthly payment. This requires a more complex formula, but you can use an online amortization calculator. For this loan, the monthly payment would be approximately $471.78.
- Calculate First Month's Interest: Take the initial loan balance ($25,000) and multiply it by the monthly interest rate (5% APR / 12 months = 0.0041667).
- $25,000 x 0.0041667 = $104.17
- Calculate Principal Portion: Subtract the interest from your total monthly payment.
- $471.78 - $104.17 = $367.61
- New Loan Balance: Subtract the principal paid from the previous balance.
- $25,000 - $367.61 = $24,632.39
You then repeat this process for each subsequent month, using the new, lower balance to calculate the next interest payment. As the balance decreases, the interest portion of each payment gets smaller, and more of your payment goes toward the principal. The table below illustrates how the payments shift over the life of the loan.
| Payment Month | Starting Balance | Total Payment | Interest Portion | Principal Portion | Remaining Balance |
|---|
| 1 | $25,000.00 | $471.78 | $104.17 | $367.61 | $24,632.39 |
| 2 | $24,632.39 | $471.78 | $102.63 | $369.15 | $24,263.24 |
| 12 | $20,789.41 | $471.78 | $86.62 | $385.16 | $20,404.25 |
| 36 | $10,816.81 | $471.78 | $45.07 | $426.71 | $10,390.10 |
| 59 | $935.29 | $471.78 | $3.90 | $467.88 | $467.41 |
| 60 | $467.41 | $469.52 | $1.95 | $467.57 | $0.00 |
While manual calculation is educational, using a spreadsheet with formulas is far more efficient for the entire loan term.
