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29 Nov 2023
If you're planning on buying a new set of shiny wheels, you may be wondering how to calculate car interest.
The interest rate on a car loan can significantly impact the total amount you end up paying for your vehicle, so it's important to understand how it works.
Car loan interest is generally no different to the interest you might pay on a home loan. Most car loans charge either a fixed (locked-in) or variable (can change) interest rate on the amount you’ve borrowed. This means in addition to repaying the initial principal, you’re also making interest repayments on top which:
A: is the monetary charge for the privilege of borrowing money from a lender, and
B: compensates the lender for the risk of lending you money.
The interest rate is typically expressed as an annual percentage rate (APR) and it can vary based on factors such as your:
To calculate car interest, you'll need to know your loan amount, interest rate, and the number of payments you will be making a year. The formula for calculating car interest is:
Total interest payment = Loan amount (outstanding balance) x (interest rate / number of payments per year)
Let's say you're taking out a car loan for $20,000 at an interest rate of 5% p.a. (with no balloon payment) and you’re making monthly repayments. In this case:
So take the formula and plug in the numbers: 20,000 x (0.05/12)
Therefore, the interest payment in the first month is = $83.33
You will find that as you continue paying off your car loan every month, your interest payments will reduce each time. Below is an example.
Over a five year loan term, the $20,000 car loan with a 5% p.a. interest rate would have monthly repayments of around $375.
To work out how much interest you’ll pay in the second month, you need to calculate how much of the loan is left to repay (your outstanding balance), which you can do using the following formula:
Outstanding balance = principal – (repayment – interest cost of last monthly repayment)
So take the formula and plug in the numbers: $20,000 - ($375-$83.33)
In this case, after the first month, your remaining loan amount would be $19,708. Using that number we can now calculate what your interest payment will be in the second month.
Interest payment (second month) = $19,708 x (0.05/12)
Manually calculating your car loan repayments can be time-consuming, so head to loans.com.au’s Car Loan Repayment Calculator for a quick and easy way to find out what your repayments will be, and how much you’ll pay over the life of your loan.
A loan term will affect your monthly repayment and your total interest costs. A longer loan term means you'll pay less in principal each month because the total amount you borrowed is broken down over more months. This can be tempting as your repayments will be lower. However, a longer term also results in more interest charges over the life of that loan. Choosing a shorter loan term (that you can comfortably afford) may save you hundreds or even thousands of dollars in interest payments.
Calculating car interest may seem daunting, but it's an important step to take when considering a car loan.
As Australia's leading online lender, loans.com.au has been helping people into their dream homes and cars for more than 10 years. Our content is written and reviewed by experienced financial experts. The information we provide is general in nature and does not take into account your personal objectives or needs. If you'd like to chat to one of our lending specialists about a home or car loan, contact us on Live Chat or by calling 13 10 90.