The total cost of a car loan

Resources · Cards, loans and credit · 5 min read Building

Key points

• The total cost of a car loan is the amount borrowed, plus interest, plus fees.
• A longer term means a smaller payment but more interest overall.
• Balloon payments lower the monthly cost but leave a large sum at the end.
• The loan is only part of the cost of owning a car.

Look past the monthly payment

Car finance is usually sold on the monthly payment. “Drive away for $X a month.” That number matters for your budget. But it tells you nothing about what the car really costs, and the total cost of a car loan is the number you want.

Here’s how it works:

amount borrowed + total interest + fees = total repaid

Compare loans on total repaid as well as the monthly payment. You’ll see a lot more.

The total cost of a car loan: a worked example

Assumptions:

• Car price: $25,000
• Deposit: $5,000, so the loan is $20,000
• Interest rate: 8% a year, fixed (monthly rate = 8% ÷ 12)
• Interest charged on the balance each month before the payment
• No fees, no balloon payment
• The last payment is whatever clears the balance

Stretch the loan from four years to seven and the payment drops by $176.54 a month. Nice. It also adds $2,748.55 in interest. Less nice.

Now add back the $5,000 deposit. On the seven-year option, you’d pay $31,184.96 in total for a $25,000 car. The same maths works in any currency.

Why the term matters more for cars

Cars usually lose value as they age. On a long loan, your car can be worth less than what you still owe for several years. That’s sometimes called negative equity.

Why does it matter? Say you want to sell or trade in early. Or the car gets written off and the insurance payout doesn’t cover what’s left on the loan. Either way, you may have to find the difference yourself.

With a shorter term, the loan balance usually falls faster than the car’s value. A longer term gives you more breathing room each month. Which way you lean depends on how long you plan to keep the car and what your budget can carry.

Balloon payments

Some car loans and finance plans come with a balloon (also called a residual or final payment). It’s a big lump sum due at the end of the term.

Because part of the loan isn’t repaid until the end, your monthly payments are lower. Here’s the catch. You pay interest on that balloon amount for the whole term, so total interest usually ends up higher. When the end arrives, you need the lump sum, or you have to sell the car, trade it in or borrow again. And if the car is worth less than the balloon by then, you may need to cover the gap.

Some people like the lower payments and plan ahead for the final sum. Others would rather not have a large amount hanging over the end of the loan. Both are reasonable, as long as you go in with your eyes open.

Fees and add-ons that raise the cost

Fees can turn up at every stage. There may be an establishment or application fee at the start, monthly account fees along the way, and an early repayment fee if you pay the loan off sooner.

Add-on products are the sneaky ones. Extended warranties or insurance sold with the loan may be added to the amount you borrow, and then they collect interest too.

Dealer-arranged finance can be convenient. Just know that the rate and fees can differ from finance arranged separately.

Line up the total repaid, with every fee and add-on included, and loans get much easier to compare (see comparing the total cost of credit). Many lenders show an annual percentage rate (APR) or a similar comparison rate, which can include some fees.

The cost of owning the car

The loan is only one piece. Running the car costs money every month too:

• Insurance and registration or licensing
• Fuel or charging
• Servicing, repairs and tyres
• Parking and tolls

A car payment that fits your budget on its own might not fit once these land on top. Put every one of them into your monthly numbers. Then you’ll see what the car really costs you.

If you’re already struggling to keep up with car loan payments, free debt help is confidential and free.

Common questions

How do you work out the total cost of a car loan?

Add up the amount borrowed, the total interest and all the fees. That’s your total repaid. Comparing loans on total repaid, not just the monthly payment, shows you much more.

Is a longer car loan worth it?

A longer term lowers the monthly payment but adds interest. In the example above, seven years instead of four cut the payment by $176.54 a month but added $2,748.55 in interest.

What is a balloon payment on a car loan?

It’s a large lump sum due at the end of the term. It lowers your monthly payments, but you pay interest on it for the whole term, and you’ll need the money (or another plan) when it falls due.

Try it

Compare terms and rates in the loan repayment calculator, or add fees in the true cost calculator to see the full amount you’d repay.

General information only, not financial advice. Your situation is your own.