How Car Finance is Calculated

Car finance can be a complex subject to understand, especially if this is your first time buying a car on loan. But it doesn’t have to be – once you’re familiar with a couple of key terms and understand how the calculations work, you’re well on your way to picking up your new car through car finance.

How to calculate the total cost of my car through car financing?

Buying a car is considered the second biggest purchase in an individual’s life, right next to buying a house or apartment. Suffice it to say, it’s a pretty big deal and there are many key decisions involved.

With multiple ways to buy a car, understanding the cost of car finance or how it is calculated can be sometimes difficult to understand. But not so anymore with our useful guide. Here’s what you need to consider:

The cost of the car

The total cost of your car finance may vary from lender to lender, but here’s how you can find out how much car finance will generally cost:

The car’s sale price

The first thing to consider when calculating the cost of car finance is the total sale price or value of your car. Once you start browsing online dealerships or lenders who provide direct access to some incredible deals, you’ll find that certain cars can be owned for as little as ￡250-500 a month.

Deposit

With most car finance schemes – e.g. like Personal Contract Purchase (PCP), leasing, and Hire Purchase (HP) – you must put down a deposit before you can own your new car.

These deposits are typically 10% of the total amount the lender is willing to afford to you, although it can be higher than 10% in some instances. With that said, there are “zero-deposit” car financing schemes available, but that means that you will be paying higher interest rates. Besides, this option is only accessible to people who have a great credit score to begin with.

Your current car’s trade-in value

This section only applies if you’re trading in your current car.

Generally speaking, the older your car, the lower its trade-in value will be. However, many people find it a good practice to trade-in their current car to shave off a few hundred to a few thousand pounds, perhaps, from the new car’s value.

Plus, you may have a high-value car on your hands, which means that you can use it as a powerful negotiation tool. There are sites that offer trade-in car buys when offering new cars but be wary – some of them tend to offer a lower value once they have physically inspected your car. Therefore, it’s often better get car financing from a private lender, particularly if this is your first time.

Factor in the other costs

Car finance revolves around the price of your new car spread out over the repayment term, plus the interest rate. However, you will find that there are certain costs to owning a car, which include:

• Car insurance – These costs tend to be higher if you’re a younger driver but are generally around ￡1,100 a year or higher.
• Vehicle tax – Also referred to as road tax, this is around ￡140 a year, depending on your car’s model and age, as well as the type of fuel it uses.
• Car MOT (Ministry of Transport) – This is usually ￡50 a year.
• Day-to-day car service – Usually around ￡150 or more per visit, but this doesn’t include repairs or parts replacement costs.
• Parking (varies from area to area and region to region across the UK).
• Registration fee for new cars only (again, varies from area to area).
• Delivery fee levied by the car dealership.
• Car depreciation over the years.

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The cost of the finance agreement

The above covers just the costs of your car. Now, let’s shift our attention to the actual costs of car financing:

Car finance interest rate

The interest rate is based on the APR or annual percentage rate set by your individual lender.

The interest rate you get largely depends on your credit score and the duration of the loan, although if you shop around, you may be able to get a low interest rate.

You can estimate your interest rate by asking to get pre-approved by your lender. This doesn’t affect your credit score as the lender will simply do a soft credit search, giving you a fair idea of the deals you may be able to get.

Your own research is probably the best way to get good rates on car finance, although it’s worth noting that newer cars will always attract lower interest rates.

VAT consideration

When you purchase a new car, VAT is typically included in the vehicle’s price, so you mostly do not need to consider it. However – you still need to double check whether it really is included in the price as advertised.

You certainly don’t want to end up dealing with a nasty surprise in the end where you realise that you must pay an additional 20% on the vehicle’s price, on account of VAT. Bear in mind that you can offset the VAT if you’re buying as a VAT-registered business.

Your finance term

Car finance agreements may range anywhere between 1 and 5 years although now, longer-term loans are becoming popular.

Keep in mind that longer loan terms do not automatically mean ‘better’. It may sound like an attractive proposition initially to make lower monthly repayments as they are stretched out over a longer term – but longer loan terms will carry a higher interest rate which means the lower payments may be recovered with a higher interest rate – meaning you may actually end up paying more compared to shorter term loans!

Conclusion

It can be overwhelming to take the plunge with car finance, particularly if this is your first time.

Liber Financial makes car finance calculations really easy, sharing everything with you up front in a clear, understandable and transparent manner, making it easy for you to pull the trigger on owning your new car.

We're here to help

Liber Financial can help you determine eligibility and make the entire process really easy for you.

Call us now to explore a variety of car financing options: 0330 174 8540. WhatsApp on 07535 812 049

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