You can easily break down the monthly payment of a car loan into the portion going toward interest and the portion going toward principal. All you need is a calculator with an exponent key.

Determine the periodic interest rate ("i") from the nominal (stated) interest rate by dividing by 12. For example, if the nominal rate is 6 percent, then the periodic rate is 0.005.

Denote the monthly payment with the letter "m." Don’t include payment for taxes, insurance and other fees in this amount. Denote the number of remaining future payments left with the letter "n." Include the payment currently being paid, for which you want the principal-interest breakdown.

Calculate the value (1+i)^n and denote it by the letter "x." Here, the caret indicates exponentiation.

Find the current balance ("b") with the following formula: M{1+ (1+1/X)/i}. This amount includes the payment that is currently due.

Find the interest portion of the payment current due by multiplying "b" by "i." This pays for the interest accumulated on the amount "b" over the prior month.

Subtract the result of Step 5 from "m" to get the portion of the currently-due payment that goes toward principal. In other words, calculate M - Bi.

#### Tips

You can confirm your work in MS Excel with the IPMT and PPMT function.

References

- "The Theory of Interest"; Stephen Kellison; 1996
- Vertex 42: Amortization Calculation Formula (Car Loan Example)
- Microsoft: IPMT Function

Writer Bio

Paul Dohrman's academic background is in physics and economics. He has professional experience as an educator, mortgage consultant, and casualty actuary. His interests include development economics, technology-based charities, and angel investing.