An individual may borrow a certain amount of money to buy a new or used car from a bank or other lender. The loan amount is commonly referred as the principal. Under the car loan agreement, the money is paid back in regular monthly installments over a designated period of time. Since the lender typically provides the money at a specified annual percentage rate (APR), you will pay back not only the principal, but also a certain amount of the interest (finance charges). As an example, calculate the finance charge for a $25,000 car loan given with APR of 6.0 percent for five years.
Calculate the loan duration in months by multiplying the number of years and 12. In this example, the five-year loan would be multiplied by 12 to give you 60 months.
Divide the loan APR by 12 and 100 to calculate the interest rate per month. In our example, the monthly interest rate is 6.0 percent / (12 x 100) = 0.005.
Add 1 to the monthly interest rate; then raise the sum to the power that equals to the loan duration in months. In our example, the value is (1 + 0.005)^60 = (1.005)^60 = 1.34885.
Subtract 1 from the value computed in Step 3; 1.34885-1 = 0.34885
Multiply the monthly interest rate and the value computed in Step 3, and divide the product by the number obtained in Step 4. In the example, (0.005 x 1.34885) / 0.34885 = 0.019333.
Multiply the loan amount by the number from Step 5 to calculate loan monthly installment payments. In the example, payments are $25,000 x 0.019333 = $483.32
Multiply the monthly payment by the loan duration to compute the total amount of money you will pay. Given the monthly payment of $483.32, you would pay 483.32 x 60 months = $28,999.20
Subtract the car loan principal from the total amount (Step 7); the difference is the finance charge for your loan. in our example, the finance charge is $28,999.20 - $25,000 = $3,999.20.