How to Calculate Compounded Interest on an Auto Loan

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When you take out an auto loan, the lender charges interest to protect against you not repaying the loan, account for inflation and make a profit. Different auto loans may have different interest compounding periods. The more often interest compounds, the higher the amount of interest you pay on the loan. To calculate compounded interest on an auto loan, you need to know how much you owe, how often interest compounds and the annual interest rate.

  • Divide the annual rate by how many times each year interest compounds to find the periodic rate. For example, if you have an auto loan that compounds interest daily and carries an annual rate of 14.6 percent, divide 0.146 by 365 to find a daily rate of 0.0004.

  • Add 1 to the periodic rate. In this example, add 1 to 0.0004 to get 1.0004.

  • Raise the answer to the power of the number of days that interest accrues before you make a payment. For example, if you make a car payment every 30 days, raise 1.0004 to the 30th power to get 1.012069861.

  • Subtract 1 from the answer to find rate of interest. In this example, subtract 1 from 1.012069861 to get 0.012069861.

  • Multiply the result by the balance of your loan to find the interest compounding on your auto loan. In this example, if you have $10,600 remaining on your auto loan, multiply 0.012069861 by $10,600 to find $127.94 of interest accrues.

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