How Is Car Finance Interest Calculated?

# How Is Car Finance Interest Calculated?

by Matthew
9 August 2021

A customer is usually expected to pay car finance interest on top of their contractual agreement when purchasing a vehicle on finance.

## What is interest?

Interest is essentially a usage fee that you pay a lender for allowing you to use their money to purchase a vehicle. Otherwise the lender in question would not get anything out of the agreement. Interest is usually included as part of the monthly fee that you pay. The other part of the fee is what you would pay to reduce the value of the car that you owe.

## How does a lender decide my interest rate?

If you or a broker (such as us) approaches a lender about your motor finance application, the lender will then assess your credit file in order to decide the APR interest rate that they can offer you. The better your credit score, the more reduced interest rate you can expect.

## How do I calculate the interest that I will pay on my car?

Once you receive your offered interest rate, make the following calculations to work out what you pay in interest monthly:

Divide it by how many payments will be made in that year. Most motor finance contracts are made in monthly payments, so the divided figure will be 12.

For example, if your interest rate is 9%, the sum will be:

0.09 ÷ 12 = 0.75

Then multiply this by the value of the vehicle. So for example, if the car is worth £15,000 the sum will be:

0.75 x 15,000 = 112.50

This means that you will pay £112.50 worth of interest in the first month of your contract.

Repeat this sum every month, but reduce the multiplied value of the car for what you have remaining to pay.

## How do I find the best interest rate on motor finance?

Here at Bright Compare, we are able to find you the best deal for your personal situation and your creditworthiness. All you have to do is start a quote and our advanced software will make a nationwide search for all of the cars on the market that may be of interest to you. One of our dedicated members of staff will be in contact to assist and advise you on all of the options available. Once you have made your decision, we will act on behalf of you to arrange a test drive, and oversee the deals between the lender, the dealer and yourself.

The customers best interests are at the core of everything that we do. We want to see you driving away in your new dream car!

## Compare car finance interest

Car finance is how people can spread out the cost of purchasing a new vehicle. The term actually covers several different types of financing that can be used to pay for a car. For most finance arrangements, the finance company buys the vehicle on your behalf and borrowers will repay the value as well as additional interest. For the majority of these arrangements, customers will pay an initial deposit, followed by a series of monthly payments.

This means that paying for the vehicle is spread out over time. This makes it much easier to purchase a car, as you do not need to put forward the whole cost up-front. However, like any other type of loan, there are rates and fees involved that can vary from lender to lender. For this reason, taking the time to do a full car finance interest comparison really important.

When you reach the end of your agreed finance term and you have made all the required repayments, you will become the legal owner of the vehicle.

## What do I need to take out car finance?

To apply for car finance, you generally have to be over eighteen years old, although individual lenders will have their own specific requirements. To start the process, you will need full contact details, our address, expenditures, incomings, and details about your employment. You will also need to know how much you want to borrow and for how long.

When thinking about applying for car finance, it’s a good idea to sit back and note how much you’re spending per month. How much can you realistically afford to repay each month? What is the status of your credit history? Knowing these details will make car finance comparison much more effective for you and your individual needs.

## What types of car finance are there?

There are many options when financing a car but there are three main options that most lenders use:

A personal loan: The simplest and most straightforward option, this involves taking out a loan from a lender to purchase a car.
Hire purchase: The buyer will pay an up-front deposit, most commonly 10%, and this is followed by monthly payments. After the end of the loan term, you will own the vehicle outright.
Personal contract: The buyer will accept lower monthly payers based on what the lender believes the car will lose in value. Throughout the process, you have the option to purchase the vehicle outright.

## How much does car finance cost?

Comparing car finance interest from one lender to another is pretty tricky, as they may offer significantly different terms. To work out the costs, a lender will use these factors:

– The potential interest: An APR (annual percentage rate) will be added to the loan and to the monthly repayments. The interest offered will usually be based on a borrower’s credit history.
– Your credit history: Your financial history will tell lenders whether you are reliable or not. A poor credit history may result in a more expensive loan.
– Loan duration: If the loan is set to be repaid over a longer term, then you will have a monthly repayment that is smaller. It is important to bear in mind that this route will involve paying more interest as the repayment period is longer than a shorter-term loan.
– Additional charges and fees: A lender may add in additional charges for any changes that you wish to make, such as paying the loan back early or making late repayments. Some lender offers may involve arrangement fees but these are not an industry standard.