The Loan Is Only Part of the Cost
Car finance is sold on the monthly payment, and dealers have considerable freedom to reach a target payment by extending the term. A figure that fits your budget can come attached to a seven-year loan on a car that will be worth a fraction of the balance halfway through.
This calculator gives the payment, the total interest and the full amount repaid, so the affordability question and the cost question stay separate.
How to Work Out Car Finance
Start from the amount financed rather than the sticker price, since deposit and trade-in change it.
- Enter the vehicle price, then subtract any deposit and trade-in value to get the amount actually financed.
- Enter the annual interest rate offered. Dealer finance and a bank loan often differ substantially, and it is worth having both figures.
- Enter the term. Anything beyond five years deserves scrutiny for the reason described below.
- Read the monthly payment and the total interest together. The interest is what the finance actually cost you.
- Compare the total repaid against the price of the car. On a long term at a high rate, the difference can be a meaningful fraction of the vehicleβs value.
- Consider running costs separately, insurance, fuel, servicing and depreciation are usually larger than the finance.
Negative Equity and Long Terms
A new car loses value fastest in its first years, commonly twenty per cent or more in year one. A long loan pays down principal slowly at the start, so for a stretch of the term the balance can exceed what the car is worth. That gap is negative equity, and it matters the moment you want to sell, trade in, or make a claim after a write-off.
The longer the term, the longer that period lasts. A three-year loan with a deposit usually stays ahead of depreciation; a seven-year loan with no deposit can be underwater for years. Insurance policies typically pay the market value rather than the balance, which is why gap insurance exists and why it is more relevant on long terms.
The Same Car on Different Terms
A 25,000 loan at 8% APR, showing what the term does to the payment and the total.
| Term | Monthly payment | Total interest | Total repaid |
|---|---|---|---|
| 3 years | 783 | 3,193 | 28,193 |
| 4 years | 610 | 4,290 | 29,290 |
| 5 years | 507 | 5,415 | 30,415 |
| 6 years | 438 | 6,570 | 31,570 |
| 7 years | 390 | 7,754 | 32,754 |
Extending from three years to seven halves the monthly payment and adds more than four and a half thousand in interest. The car is the same; only the financing changed.
PCP, HP and Buying Outright
This calculator models a conventional amortising loan, where every payment reduces the balance and you own the car at the end. Personal contract purchase works differently: payments cover depreciation over the term with a large balloon payment at the end, which produces a lower monthly figure and a decision to make when the term ends. Comparing a PCP payment against a loan payment without accounting for the balloon is not a like-for-like comparison.
It also excludes everything that is not the loan. Insurance, fuel, tax, servicing, tyres and depreciation typically add up to more than the finance cost over the life of ownership, and depreciation alone is usually the largest single expense of owning a new car.