How to calculate interest repayments on a car loan
Dominic Beattie
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- Understanding how interest repayments are calculated on a car loan can help you save money
- The interest rate you will be offered on a car loan will depend on your credit history and your current financial situation
- There are ways to minimise the total interest you pay including opting for a shorter-term loan and avoiding a ballon payment
The interest on a car loan generally isn't all that different to how it's levied by home lenders, with a few variations.
How car loan interest works
With the exception of 0% car finance advertised by some dealers, most car loans charge either a fixed or variable interest rate on the amount you've borrowed. That means you're likely repaying the amount you borrow, plus interest, on a monthly, fortnightly, or weekly basis over a set period of time.
The interest rate is just one component of a car loan. Other factors that can influence how much you're up for include:
Before you sign on any dotted lines, run your numbers through our car loan calculator.
What’s a good interest rate for a car loan?
A low advertised interest rate on a car loan may not necessarily be the one every buyer is offered. The interest rate you'll pay on a car loan depends on many factors including:
- your credit history
- current financial position
- the age and type of car you're purchasing
- the lender
- whether the loan is secured or unsecured
- whether the vehicle qualifies for a ‘green’ car loan
The table below will give you some idea of the most competitive rates currently available on the market:
| Lender | Car Loan | Interest Rate | Comparison Rate* | Monthly Repayment | Interest Type | Vehicle Type | Maximum Vehicle Age | Ongoing Fee | Upfront Fee | Total Repayment | Early Repayment | Instant Approval | Online Application | Tags | Features | Link | Compare | Promoted Product | Disclosure |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
5.94% p.a. | 7.07% p.a. | $579 | Variable | New | $8 | $400 | $34,749 |
| Promoted | Disclosure | |||||||||
5.67% p.a. | 6.10% p.a. | $575 | Fixed | New | $0 | $350 | $34,524 |
| Promoted | Disclosure | |||||||||
5.95% p.a. | 5.95% p.a. | $579 | Fixed | New | $0 | $0 | $34,757 |
| Promoted | Disclosure |
What is a comparison rate on a car loan?
A comparison rate is often seen as the ‘true’ cost of a loan. It reflects the interest rate as well as some loan fees and revert rates if the loan includes a temporary introductory or 'honeymoon' rate.
Essentially, the closer the interest rate is to the comparison rate, the lower the costs associated with taking out the loan.
Comparison rates are legally required when advertising car loans, but should only be used as a guide.
They're based on a standard $30,000 car loan over a five-year term. If you’re borrowing substantially more or less than $30,000 over a longer or shorter loan term, it's worth running your own figures to get a clearer idea of costs.
Savings.com.au's two cents
When you're looking a car loans, here are some good general tips to observe.
- Focus on total cost, not monthly repayments
- Try to put down a solid deposit - around 20% - to lower both the loan amount and the interest rate you may be offered
- Check comparison rates rather than advertised rates
- Avoid excessive add-ons such as extended warranties and loan protection - they may not be the best value products on the market
How to calculate interest on a car loan
Say you take out a $20,000 car loan at an interest rate of 7.5% p.a. over five years. This would require 60 monthly repayments of around $401 - or a total of $24,060 over the term of the loan.
If you’re the type that prefers to do calculations yourself, working out your regular interest payments is done using the standard amortisation formula:
Interest payment = outstanding balance x (interest rate / number of payments per year)
or
20,000 x (0.075/12)
How we got there:
- the outstanding balance is 20,000
- the interest is 0.075 (7.5% expressed as a decimal)
- number of payments per year is 12
The interest-portion of the first month's repayment is: $125
As you continue to pay off your loan, the amount going towards interest will shrink with more of your regular $401 repayment going towards paying off the principal.
To work out how much interest you’ll pay in the second month of your loan term, you'll need to calculate how much of the loan balance is left to repay using the formula:
Outstanding balance = principal – (repayment – interest cost of preceding repayment)
= 20,000 – (401-125)
= 19,724
In this case, after the first month, your remaining debt would be $19,724. Using that number we can now calculate what your interest payment will be in the second month.
Interest payment = 19,724 x (0.075/12)
= $123.28
See below how the interest paid and amount owed continues to shrink over the first ten repayments:
| Month | Principal | Monthly repayment | Interest paid | Amount owed |
|---|---|---|---|---|
| 1 | $20,000 | $401 | $ 125 | $19,724 |
| 2 | $19,724 | $401 | $ 123.28 | $19,446.28 |
| 3 | $19,446.28 | $401 | $ 121.54 | $19,134.69 |
| 4 | $19,134.69 | $401 | $ 119.59 | $18,853.28 |
| 5 | $18,843.28 | $401 | $ 117.83 | $18,560.11 |
| 6 | $18,560.11 | $401 | $ 116 | $18,275.11 |
| 7 | $18,275.11 | $401 | $ 114.22 | $17,988.33 |
| 8 | $17,988.33 | $401 | $ 112.43 | $17,699.76 |
| 9 | $17,699.76 | $401 | $ 110.62 | $17,409.38 |
| 10 | $17,409.38 | $401 | $ 108.81 | $17,117.19 |
Source: calmaccer
Doing the maths is not so nerdy if you can use it to save you money.
How interest rates affect car loan repayments
Of course, shopping around for the lowest interest rate you can secure will significantly reduce the total amount you will pay on your car loan, as the table below illustrates:
Total cost of loan over five years
| $20,000 loan | $30,000 loan | $50,000 loan | |
|---|---|---|---|
| 7.5% interest rate | $24,060 | $36,068 | $60,114 |
| 10% interest rate | $25,496 | $38,245 | $63,741 |
| 15% interest rate | $28,548 | $42,822 | $71,370 |
Source: Savings.com.au Car Loan Calculator
What else can impact repayment of a car loan?
Term
If a buyer wants to borrow more but can't meet the regular repayments, they might consider taking out the loan over a longer term.
But paying less in repayments over a longer period means you'll pay more in total interest. The table below shows the total cost of the same loan over seven years:
The total cost of loan over seven years vs five years (in brackets)
| $20,000 loan | $30,000 loan | $50,000 loan | |
|---|---|---|---|
| 7.5% interest rate | $25,769 ($24,060) | $38,653 ($36,068) | $64,420 ($60,114) |
| 10% interest rate | $27,890 ($25,496) | $41,835 ($38,245) | $69,725 ($63,741) |
| 15% interest rate | $32,418 ($28,548) | $48,628 ($42,822) | $81,046 ($71,370) |
Source: Savings.com.au Car Loan Calculator
Repayment frequency
Most lenders offer monthly repayments as a default, but you may have the option of paying fortnightly or weekly. By increasing the frequency of your repayments, you can reduce the total interest you incur.
Let’s take another look at the total cost of the same 7.5% p.a. interest loans, with weekly and fortnightly repayments instead of monthly.
Total cost of a loan over five years, paying weekly, fortnightly, and monthly
| $20,000 loan | $30,000 loan | $50,000 loan | |
|---|---|---|---|
| Weekly repayments | $23,980 | $35,968 | $59,948 |
| Fortnightly repayments | $23,980 | $35,970 | $59,949 |
| Monthly repayments | $24,047 | $36,068 | $60,114 |
Note: This assumes the lender calculates weekly and fortnightly repayments as the annual repayment divided by 52 and 26, respectively.
On smaller loan amounts, there are only modest interest savings to be made through more frequent repayments, but some borrowers may prefer them for budgeting reasons, in line with their weekly or fortnightly pay cycles.
Balloon payments
Another common tool many borrowers use to reduce their regular repayments is what's called a balloon payment.
A balloon payment is a portion of the loan amount a borrower must repay as a lump sum at the end of their loan agreement.
Balloon payments can be significant – typically between 30% and 50% of the loan amount – and can be an effective way for borrowers to reduce their regular repayments during the loan term.
However, interest is still charged on the balloon amount over the course of the loan. It means you'll end up paying more total interest over the loan term since you aren't paying down the balloon amount over time.
Balloon example
If you took out a $30,000 car loan for five years with a 7.5% p.a. interest rate and had a (30%) balloon of $9,000, your monthly payments would fall from $601 (with no balloon) to $477 (with balloon).
The table below illustrates the other implications:
| Cost of a $30,000 5 Year Car Loan at 7.5% p.a. Interest Rate (Excl. fees) | 30% Balloon | No Balloon |
|---|---|---|
| Monthly repayments | $477 | $601 |
| Total repayment over five years | $28,623 | $36,068 |
| Balloon payment | $9,000 | $0 |
Total interest cost | $7,623 | $6,068 |
Source: Savings.com.au Car Loan Calculator
So, while a balloon payment can significantly lower regular repayments, it also typically sees borrowers paying much more in interest over the loan term (more than $1,500 in this case).
Of course, borrowers will also have to come up with a $9,000 lump sum at the end of their loan which needs to be accounted for.
How to get a lower car loan interest rate
In addition to doing your research and shopping around, you may be able to secure a lower car loan interest rate by doing some (or all) of the following:
- Improving your credit score: Improving your credit score can make you eligible for more competitive car loans
- Cleaning up your finances: Someone with sizable outstanding debts will be less likely to get a competitive car loan, or may even be rejected
- Demonstrating savings skills: Lenders like to see a history of solid savings as shows a borrower has the discipline needed to meet repayments
- Consider buying a ‘green’ car: Some lenders offer ‘green’ car loans, typically with lower interest rates for electric or low-emissions cars, saving you money while you help save the planet
- Look to a lender over a dealer: While it's not always the case, financing through a car dealer will usually attract a higher interest rate than those offered by car loan providers
- Go secured over unsecured: Generally, secured car loans offer lower interest rates than unsecured car loans as the car itself is used as security against the loan, meaning the lender can repossess it if you fail to make your repayments
