How To Calculate Interest On A Car Loan

Learn how to calculate interest on your car loan with our comprehensive guide.

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, updated on June 30th, 2023       

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How to calculate interest on a car loan?

Calculating interest on a car loan can prove difficult as some car loans do not advertise the full cost of taking out a loan. You can only know how much a loan will cost when a lender or bank shows you the comparison rate, which includes most fees and charges you’ll pay over the length of a loan term – account keeping fees for example – shown as a percentage.

Once you know this figure, you can use a car loan calculator to figure out how much interest you’ll be paying over the term of a loan. You can also use a calculator called an amortisation table to show you how much interest you’ll be paying per repayment, provided your car loan has a fixed interest rate.

Why repayments matter most

Knowing how much you will repay each payment period gives you a better idea if you can pay back the loan. By looking at your incoming and outgoing finances, you can figure out your borrowing capacity. If you earn $1000 a week and spend $600 on essentials, this leaves you with $400 disposable income.

You may think your borrowing capacity can accommodate $400/wk in repayments. However, this isn’t the case; when you buy a car, you must factor in registration, fuel, insurance, and other maintenance costs. When all these are factored in, it may leave you $250 or so per week for repayments – in the very best-case scenario. Over a five-year loan at 8.99%p.a. with $10 account keeping fee, you could borrow around $50,000 as approximate payments are $241 per week.

Remember; you need to look at your own budget and figure out if you can afford such a loan; usually lenders would be wary of someone taking out a large loan they can only handle on paper; it’s possible a lender may reject their application.

Instead of just looking at interest rates, which do not give you a complete picture of what loan will cost you, look at the repayments and see if they fit your budget. You should also factor in conditional fees and charges. You can use a car loan calculator to get approximate repayment figures.

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Calculating car loan interest and repayments made easy

Calculating interest – not the full story

If you’re looking for car finance you’ll see two terms that seem interchangeable but have two different meanings: the interest rate, e.g. 9.99%p.a. (per annum, or per year) and a comparison rate. These numbers are expressed in the same way but show you two different figures.

The interest rate is how much you’re expected to pay on top of the borrowed amount, or the principal, in exchange for fronting you a large sum of money up front. The comparison rate includes this amount and all the most common fees and charges such as account keeping fees. It also shows you a uniform rate that factors in the loan term loan amount, and payment frequency.

What a comparison rate does not show are conditional fees, triggered by certain events. these include (but are not limited to) establishment fees, application fees, early exit fees, break fees, discharge fees, and refinancing fees.

Variable car loan interest rates – why they’re hard to budget for

Repayment tables and amortisation calculation is easy when they’re for fixed rate car loans. You divide the principal and the interest up over sixty months and pay off the loan in the allotted time. In a variable rate loan, these repayments can vary due to the nature of variable rates. Variable rates can climb up or down depending on the market. If the market for loans get tighter, your interest rate can go up and so do your repayments. If the market eases, your interest rate can go down along with your repayments.

In many cases, a variable rate is a gamble – do you go along with the market and hope it drops? Or do you make the most of record low interest rates now and hope they don’t shoot up? Either way, your monthly repayments may change from one month to the next, which makes budgeting all the more harder.

How to calculate interest and repayments with a car loan calculator?

A step-by-step guide to calculating interest.

Set your budget

Figure out how much you can afford to borrow first. Calculate your incoming and outgoing finances for each month to come up with a figure you can comfortably pay back. Remember to factor in insurance, fuel, maintenance, and other expenses.

Enter the interest rate

If you are looking at loans online, enter in the interest rate you find advertised. If this is a comparison rate, you can skip the next step.

Include fees and charges

If you can, enter in all the monthly fees and charges you’ll pay over the course of the loan.

Set your loan term

Figure out how long you want to pay the loan off in – this is typically five years.

Repayments and amortisation

The calculator will show you your approximate repayments per month using the data provided. You may be able to see an amortisation schedule, which shows you a breakdown of how much principal and interest you’re paying off each month. Remember this should only be a general guide, not a concrete estimate.

More insight into car loan interest and other terms

What is a comparison rate?

A comparison rate is an interest rate the encompasses all the major fees and charges payable throughout the course of a loan. For example, an interest rate of 7% may look good, but with fees and charges this can balloon out to 10%. The comparison rate gives a buyer a complete picture of how much the loan will cost overall.

What is depreciation?

Depreciation is the rate at which an asset loses its value. When buying cars, you will typically lose 20% of the value when driving a new car home from your purchase place. That means if you paid $20,000 for a car, it will be worth $18,000. Cars depreciate due to newer models replacing older ones, wear and tear, damage, and other factors.

What is the amortisation table?

An amortisation table is an itemised breakdown of repayments showing how much of the principal and interest is being paid off per repayment cycle. This can be shown as monthly, fortnightly, or weekly payments. The amortisation table is more accurate for fixed rate, rather than variable rate, car loans.

What is borrowing capacity?

Borrowing capacity refers to the amount a customer can borrow from a lender without having trouble paying back the loan. A customer with a high borrowing capacity can borrow more money; a low borrowing capacity means a customer may only be approved for smaller amounts.

How do I use a car loan calculator?

Using a car loan calculator needs three bits of information: how much you intend to borrow; the interest rate; and your loan term. Some calculators may also allow for adding regular fees. Once you input these figures, a calculator will show you the total estimated cost of the loan including the amount of interest you’ll pay. Note that this only shows accurate representations of fixed rate car loans. Remember any calculation you make are only estimates and not final figures.

What is creditworthiness?

Creditworthiness is the term banks and lenders use to refer to someone’s risk level when it comes to credit and finance. High creditworthiness means the prospective borrower is a low risk. This means banks and lenders are more open to approving loans and offering lower interest rates. Low creditworthiness means someone is a higher risk, and may encounter difficulty gaining finance and credit.

What is a loan term?

A loan term is the length of time a borrower has in order to pay back a car loan. The average car loan term is five years, though some lenders offer terms as little as 12 months or as long as 7 years.

Can I get a no credit check car loan?

Some specialist lenders such as P2P lenders may lend to customers without conducting credit checks. However any accredited lender or broker must conduct credit checks as part of Australian responsible lending practices.

Can I get a car loan if I’m on disability or pension payments?

Yes, some lenders will approve customers on disability or pension payments for car loans. You may have to fulfill a certain income threshold before approval. Other alternatives are P2P lenders or micro-financing organisations that help provide low-interest loans for people in need.

I have bad credit, can I apply for a car loan?

Yes; people with bad credit can apply for a bad credit car loan. However, the interest rates are much higher compared with “prime” or mainstream consumer car loans. These can be high as 20-30% p.a. Make sure you only consider accredited brokers or lenders to avoid any difficulties.

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