To compare loans or car finance fairly, look at the total amount repaid, not just the monthly payment. A lower monthly figure can cost more overall if the term is longer. In our example, a £16,000 loan at 6.9% over 48 months costs £164 less in total than the same loan at 9.9% over 36 months, despite a lower monthly payment.
What APR means
APR stands for annual percentage rate. It is meant to show the yearly cost of borrowing, including interest and certain compulsory charges, so that different offers can be compared on a like-for-like basis. In general, a lower APR means cheaper borrowing for the same amount and term, but it does not tell the whole story: the term and any fees also affect what you pay. Always read the lender’s documents to see exactly what the quoted APR includes.
How a loan payment is calculated
Fixed-rate loans use the same formula as a repayment mortgage, with the monthly rate being the annual rate divided by 12. The workings are covered in How mortgage repayments are calculated. Each month you pay interest on what you still owe plus some of the capital, so the loan clears by the end of the term.
For a £250,000 loan at 4.5% over 25 years, the payment is £1,389.58 and the total interest about £166,874. Car loans use the same maths on a much smaller scale and a much shorter term.
Comparing two car finance offers
Imagine a £18,000 car with a £2,000 deposit, so £16,000 is borrowed. You have two offers:
| Offer A | Offer B | |
|---|---|---|
| APR | 6.9% | 9.9% |
| Term | 48 months | 36 months |
| Monthly payment | £380.85 | £512.36 |
| Total interest | £2,280.80 | £2,444.87 |
| Total repaid | £18,280.80 | £18,444.87 |
Offer A has the lower monthly payment and the lower total cost, by £164.07. Here the cheaper rate and the longer term both point the same way. If the rate had been the same, the longer term would have cost more overall, because interest builds up for longer. These figures ignore fees.
Types of car finance
Names and details vary by lender, so check the paperwork. Common types include:
- Hire purchase (HP): you pay off the car in instalments and own it after the final payment.
- Personal contract purchase (PCP): lower monthly payments, with a larger final “balloon” payment if you want to keep the car. The calculator accepts a balloon amount.
- Personal loan: you borrow money and buy the car outright, owning it from the start.
A balloon payment lowers the monthly cost but is still part of the total cost, so include it when comparing.
What to check before you sign
- Total amount payable, not just the monthly cost.
- Fees, such as arrangement or option-to-purchase fees.
- Early repayment terms if you may want to settle sooner.
- Mileage limits and condition rules on PCP deals.
- Whether you can afford the payment if your income falls.
Since the cost of borrowing is interest charged over time, the logic in Compound interest explained, with examples works in reverse here. Saving up some or all of the price first, as in How long to reach a savings goal, can avoid interest altogether, though it takes longer.
Avoiding common comparison mistakes
People often focus on the headline monthly cost or on the lowest APR alone. A better approach is to line the offers up on the same basis: same amount borrowed, same deposit and the same assumptions about fees and any balloon payment. Then compare the total repaid and the monthly payment against your budget.
It is also worth asking what happens if you want to end the agreement early, or if the car’s value turns out to be lower than expected. Shorter terms usually cost less in interest but need a higher monthly payment, so choose a term that you can afford comfortably rather than the cheapest on paper.
Note: This is general information, not financial advice. The calculators give estimates and ignore fees. Missing payments can damage your credit record and borrowing may put your assets at risk.
Try the calculator
Compare two offers side by side in the Car finance and loan comparison, or work out the repayment on any standard loan with the Loan repayment.
Frequently asked questions
Is a lower monthly payment always better?
No. A longer term can reduce the monthly figure while increasing the total interest. Compare the total amount repaid as well as the monthly payment.
What is APR on a loan?
It is the annual percentage rate, designed to show the yearly cost of borrowing so offers can be compared. Check what your lender includes in the figure.
What is a balloon payment?
It is a final lump sum due at the end of some finance deals, such as PCP, if you want to keep the car. It forms part of the total cost.
Should I put down a bigger deposit?
A larger deposit means you borrow less, so you usually pay less interest and have smaller payments. Make sure you keep enough savings for emergencies.