How your car loan repayment is worked out
A car loan is repaid with the standard amortisation formula. Each repayment covers the interest charged on the balance for that period, and whatever is left over reduces the amount you still owe. Because the balance shrinks over time, the interest portion of each repayment falls and the principal portion rises, so the loan clears at the end of the term. The formula behind it is repayment = r × (P − B(1 + r)−n) ÷ (1 − (1 + r)−n), where P is the amount borrowed, B is any balloon left at the end, r is the interest rate for a single period, and n is the total number of repayments. With no balloon, B is zero and this becomes the plain amortisation formula. The calculator applies it for weekly, fortnightly and monthly repayments.
Loan amount, or price minus deposit and trade-in
You can enter the amount you want to borrow directly, or switch to car price and let the calculator work out the loan for you. On the car price view it takes the drive-away price, subtracts your cash deposit and the value of any trade-in, and the remainder is what you finance. A larger deposit or a trade-in cuts the amount borrowed, which lowers every repayment and the total interest. Stamp duty, registration and dealer fees are not included, so add those to the price if your lender rolls them into the loan.
What a balloon payment does to the cost
A balloon, or residual, is a lump sum you agree to leave owing at the end of the term. Because you amortise less of the loan across the term, your regular repayment drops, which is why dealers often push them. The catch is that the balloon is still due when the term ends, and interest builds on it the whole time. Most people refinance the balloon, pay it out or sell the car to clear it. The calculator folds the balloon into the total cost and the balance chart shows the line falling to the balloon amount rather than to zero, so you can see exactly what is still owed.
Weekly, fortnightly or monthly repayments
The frequency you choose changes the size of each repayment, not the maths behind it. A fortnightly repayment is worked out on a true fortnightly period, with 26 repayments a year, so it is not the monthly figure halved. Over the same term the three frequencies cost close to the same in total interest. Matching repayments to your pay cycle mainly helps with budgeting, and any real saving comes from paying a little extra rather than from the frequency itself. The comparison table above shows all three side by side.
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Simon is the founder of Orbit Money, a tool that helps people track subscriptions and recurring spend. He builds Orbit's free money calculators and writes about personal finance for Australian and UK readers.
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