Learn how to calculate interest on your car loan with our comprehensive guide.
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.
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.
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.
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.
A step-by-step guide to calculating interest.