How car loan repayments work

The principal is the amount borrowed that remains unpaid. Interest is the cost of borrowing, calculated under the terms of the loan. A regular principal-and-interest repayment pays the interest due and reduces some of the balance. Fees may be charged separately or included in the financed amount.

On many amortising loans, more of each early repayment goes towards interest because the outstanding balance is larger. As that balance falls, the interest component generally reduces, assuming the rate and repayment structure do not change. Ask how interest is calculated and when payments are credited.

Your deposit or trade-in may reduce what you need to borrow, but financed fees and optional products can increase it again. Check the amount financed line by line. If an existing car loan has a payout greater than the trade-in value, ask how that shortfall will be handled.

Borrowing for an optional product means you may also pay interest on its cost. Consider whether you need it, whether you can buy it separately and what cancellation terms apply. Do not compare quotes on repayment alone if they include different extras or different amounts borrowed.

Spreading repayments over a longer term generally lowers each repayment, but can increase total interest when other factors are unchanged. A shorter term usually requires more room in the budget each month. Neither choice should be made without allowing for running costs and other commitments.

Consider how long you expect to keep the car and how it may hold its value. You could owe more than a sale or insurance payout provides, particularly early in the loan. Selling the vehicle does not automatically remove the obligation to repay any remaining balance.

Weekly, fortnightly and monthly repayments should be compared on a consistent annual basis. A fortnightly schedule has 26 payments in a year, not 24. Simply dividing a monthly figure by two may not reproduce the lender’s actual repayment schedule.

Choose a due date that fits reliable income where the lender allows it, and keep enough money available before a direct debit. Ask what happens on weekends or public holidays. If you pay extra, confirm whether it reduces principal immediately, changes future required repayments or attracts a fee.

• Check the first payment date and regular due dates.
• Confirm fees for missed or dishonoured payments.
• Ask whether extra repayments and early payout are restricted.

A balloon is a specified final payment remaining at the end of the term. It can reduce the regular repayment compared with an otherwise similar fully amortising loan, but it does not make that final amount disappear. Interest may still be charged on the outstanding balloon during the term.

Plan how you would meet the final payment without assuming you can refinance or sell for a particular price. Future finance depends on eligibility at the time, and vehicle values are uncertain. Compare total repayments, including the balloon, rather than treating it as separate from the borrowing cost.

A repayment calculator is useful for testing loan amounts, terms and rates. Its result depends on assumptions about fees, payment timing and interest. It may not model every feature of a particular loan, so treat it as a budgeting tool rather than an approved repayment.

Before signing, review the interest rate, any comparison rate and its assumptions, all fees, total amount repayable and security conditions. Ask whether the rate is fixed or variable. If repayments become difficult, contact the lender early to discuss available hardship support rather than waiting for missed payments to accumulate.