How car loan repayments work: the factors that set your number

The basics

You borrow an amount and repay it over an agreed period, called the loan term. Each repayment covers part of the amount borrowed (the principal) plus interest on the balance still owing. Early in the loan, more of each repayment goes to interest. As the balance falls, more goes to principal.

The six factors that shape your repayment

Every car loan repayment is built from the same ingredients:

• Loan amount: the more you borrow, the higher the repayment. A deposit or trade-in reduces the amount financed.
• Loan term: a longer term lowers each repayment but usually increases the total interest you pay. A shorter term does the opposite.
• Interest rate: a higher rate means more of each repayment goes to interest.
• Fees and charges: establishment, account-keeping and other fees add to the overall cost, whether they're paid upfront or built into the loan.
• Repayment frequency: weekly, fortnightly or monthly. Matching repayments to when you're paid can make budgeting easier.
• Balloon or residual: a lump sum left owing at the end lowers the regular repayment, but increases the total cost and has to be dealt with when the term ends.

What influences your interest rate

Rates vary between lenders and between borrowers. Common influences include your credit history, the age and type of vehicle, the loan amount and term, any deposit, and each lender's own criteria. Many car loans have a fixed rate, which keeps your repayments the same for the whole term and makes budgeting simpler.

Look past the headline rate

The comparison rate combines the interest rate with most standard fees and charges into one figure, so it's a more useful guide to overall cost than the headline rate. It's calculated on a standard loan amount and term, though, so treat it as a guide rather than an exact figure for your loan.

Also check for fees the comparison rate may not capture, such as late payment fees, charges for extra repayments, and early payout or termination costs. If you think you might pay the loan off early, ask how that works before you commit.

Choosing a frequency and a term that fit

The right setup is one you can comfortably afford every pay cycle, with room left for fuel, insurance, rego, servicing and your other living costs. The lowest possible repayment isn't always the best choice if it comes with a much longer term or a large balloon.

Our calculators let you test different amounts, terms and balloon options to see how each one changes the repayment. Results are estimates only.

Before you sign

Read the contract carefully and make sure you understand the repayment amount and frequency, the term, the rate, all fees, any balloon, and what happens if you miss a payment or want to finish early. If anything is unclear, ask before you sign, not after.

General information only

This article is general information only. It does not take your personal circumstances into account and is not personal credit, legal or financial advice. Rates, fees and loan terms vary between lenders and borrowers, and all finance is subject to lender assessment and approval.

Related finance