# Why Does My Car Loan Interest Fluctuate Despite Having a Fixed Interest Rate?

I'm finding the interest amount I'm paying a bit confusing as it doesn't seem to follow a consistent pattern. For instance, I expected the interest I pay to decrease gradually after purchasing my car at a fixed 3.5% interest rate. However, upon reviewing the statements and tables, I've noticed that the interest amount isn't decreasing as anticipated. I'm uncertain if I'm interpreting this correctly. Could someone please offer guidance on what steps I should take next?

• @Mostafiz, easier to do analysis if data was posted as text rather than a pic. Dec 13, 2023 at 13:43
• @chux-ReinstateMonica I will keep that in mind for any future post. Dec 13, 2023 at 15:48
• Strange how the document reads "transcation" rather than "transaction" in both places. You'd think someone would have noticed by now. Dec 13, 2023 at 19:19
• tl:dr: it doesn't, it's calculated daily and aggregated by whatever the (variable) period is between 2 payments Dec 14, 2023 at 18:12
• Just a quick sanity check - is the question about whether interest is decreasing, or about checking the precise amount? Because on my first scan of the table it was very confusing to see the interest going up, until I realized the table is sorted by most recent transaction first. Dec 15, 2023 at 22:51

## 3 Answers

Car loans and other retail loans often use an ACT/ACT or ACT/365 day count where interest is charged based on the number of days between payments rather than a flat 1/12 of the annualized rate (which is more common for mortgages and other longer-term loans) each month. You'll notice that payments after months with 31 days have a slightly higher interest amount than those with 30 days, and the March payment has a noticeably lower interest amount. There is also some fluctuation since the payments are not always applied on the same day of the month (e.g. the 2/9/2023 payment includes one more day than the 1/8/2023 payment)

The interest is calculated as a percentage of the prior balance. For example, the interest amount for 12/8/2022 looks to be be `35,176.15 * 3.5% * (30/366)` where 30 is the # of days between 11/8/2022 and 12/8/2022. It's not clear why 366 is used instead of 365 but that is what matches the result most closely (and works in your favor).

Some loans will count only business days (and divide by some number around 252), not calendar days, but generally these differences are not material to you, it just makes the settlement and accounting easier on their end.

There is still a downward trend as you pay down principal, but you won't necessarily see every month's interest lower than the one before.

Could someone please offer guidance on what steps I should take next?

Pay it down as fast as possible? That will reduce the interest paid significantly (as can be seen after the "extra" payment in June). In the end the fluctuations based on day count will even out, so there's not really anything to "do".

• Thank you for your response. If I choose to refinance with a different bank, does that imply that I've been paying an interest rate higher than 3.5% with my current bank? Dec 12, 2023 at 19:05
• No, it means you've been paying more than (3.5%/12) in months with 31 days and less than (3.5%/12) in month with 30 days, so the average over the year will be very close to 3.5%. Dec 12, 2023 at 19:12
• To verify, take the data you show in the screenshot and calculate 3.5%/12 of the prior balance in each row, then sum up the total compared to the interest you actually pay. I suspect that the difference in not material (a few dollars over the year) Dec 12, 2023 at 19:23
• The interest is calculated as a percentage of the prior balance, not the payment. So for example the interest for 12/8/2022 looks to be be 35,176.15 * 3.5% * (30/366) where 30=# of days between 11/8/2022 and 12/8/2022. It's not clear why 366 is used instead of 365 but that is what matches the result most closely (and works in your favor) Dec 12, 2023 at 20:29
• @Darren There are two June payments. The normal one on the 8th, and a "principal only" payment of \$2k+ on the 9th. Dec 13, 2023 at 8:08

Years ago, I asked a banker about such to pre-determine my monthly loan balance.

Factors included:

• Interest based on `Annual Percentage Rate/365 * elapsed days` rather than `Annual Percentage Rate/12 * 1 month`.

• Number of calendar days between payments due to unequal days per month.

• Exclusion of Saturday/Sunday as a monthly payment date, pushing payment from the Nth of the month to the next Monday.

• Exclusion of Bank holidays (often on a Monday) pushing to the next day.

• In my case, the rated was variable based on some updated monthly public rate (plus a fixed offset).

• I never did find if `Annual Percentage Rate/365` should be `Annual Percentage Rate/366` in leap years.

In the end, my math matched what the bank was doing other than it was always rounding interest down to the 0.01 in my favor.

But what I remember most was at the end of the (somewhat getting long) conversation, the banker asked, "if I was an Engineer?" --> Guilty.

• Apropos of your postscript: programmers deal with that sort of judgement a lot too Dec 13, 2023 at 17:00
• @bertieb well programming and engineering do tend to draw from a largely overlapping pool of people. If I'd been born a 50 years earlier I'd probably have been a EE instead of a CS. Dec 13, 2023 at 22:00

I appreciate everyone's contribution, everyone have been very helpful. I know how much interest rate I should be paying, so I used the following formula(gathered from everyone's helpful input) to match the interest rate I paid.

``````actual_interest_rate = (100*(Interest_paid/(previous_month_balance*((#of_days_passed_from_current_effectiveDate_to_last_effectiveDate)/365))))

actual_interest_rate matched with my expected_interest_rate
``````