Car loans and compound interest
Most car loans are repaid in fixed monthly instalments. Each payment covers that month's interest and pays off some of the balance, so interest is charged on a falling amount. If you're repaying normally, the car loan interest calculator or car finance calculator will show your real cost.
Compound interest builds up a balance when nothing is being repaid, for example during a payment holiday or if payments are deferred. Interest is added to the balance and then charged on itself. This calculator assumes no repayments during the time period.
Worked example
Borrowing £15,000 at 8% a year, compounded monthly, with nothing repaid for 4 years, you'd owe £20,634.99 at the end. That's £5,634.99 of interest, and a balance 1.38 times the amount borrowed.
Repaid in equal monthly instalments over the same 4 years at the same rate, the loan would cost £366.19 a month and £2,577.30 in interest. Repaying as you go costs less than half as much in interest, because the balance falls each month.
Missed payments on car finance
If you miss payments, lenders may add fees on top of interest, and it can harm your credit record. With some types of car finance, the car can be taken back if you fall behind. Talk to your lender early if you're struggling to pay.
Inputs for the car loan compound interest calculator
Amount borrowed
The balance you start with, such as the amount you borrowed for the car or the amount you owe now.
Annual interest rate
The yearly interest rate on the loan. The rate shown is only an example, so enter the rate from your loan agreement.
Time period
How many whole years the balance builds up with nothing repaid.
Interest compounds
How often interest is added to the balance: daily, monthly, quarterly or annually. Check your loan agreement if you're not sure.
CALCULATOR QUESTIONS
Car loan compound interest calculator questions
Do car loans use compound interest?
Interest on a car loan is usually charged on the outstanding balance, which falls as you repay. It only compounds into a growing balance when payments stop or are deferred.
How much would an unpaid £15,000 car loan grow to?
At 8% compounded monthly, it would grow to £20,634.99 after 4 years if nothing were repaid.
How much interest would I pay if I repay normally?
£15,000 at 8% repaid monthly over 4 years costs £366.19 a month and £2,577.30 in interest. Use the car loan interest calculator to try your own figures.
Does this include fees or a balloon payment?
No. It shows interest on the amount borrowed only. Arrangement fees, option-to-purchase fees and balloon payments on some car finance deals aren't included.