How to check a car loan


Zero Percent Loans ⇦ Calculate Loan ⇨ Buy The Best Car

How to calculate the payments and interest

Once the car salesperson has given you all the figures for the deal – CHECK THEM! You are free to use our Car Loan Calculator where you can enter any 3 of the four factors – Amount, Term, Repayment, Rate – and it will calculate the missing one. For example, if you know the Amount, Term and Repayment it will show you the actual Flat rate you are being charged. Or, if you know the Term, Repayment and Rate, it will show you how much you are really borrowing. Even if the salesperson tells you all four factors, enter any three of them into the Car Loan Calculator and make sure that the answer it comes up with is the same as the salesperson is telling you – if it isn’t something is wrong!!!

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Of course you can’t use our Car Loan Calculator while you are sitting in a car showroom, but you can calculate these figures yourself… any calculator will do… for all the following calculations the Term is the number of months…

Calculate loan repayments

Do this when you know the Amount, Term and Rate of the loan:

Step Buttons to press on calculator Explanation in words
1 Rate x Term Multiply the Rate by the Term
2 ÷ 1200 Divide the answer by 1200
3 + 1 Add 1
4 x Amount Multiply by the amount
5 ÷ Term = Divide by the Term

Example

Suppose you are borrowing £10000 over 3 years (36 months) at a Flat rate of 4.8%

Step press Calculator shows
1 4.8 x 36 = 172.8
2 ÷ 1200 = 0.144
3 + 1 1.144
4 x 10000 = 11440
5 ÷ 36 = 317.77777

So, when you calculate the repayments for this loan you will see that the repayments are £317.78 per month. Make sure that this agrees with what you are being told by the salesperson. If they are telling you that the monthly repayments are different to this figure… something does not add up… at best - they have made a “mistake” with one of the figures… at worst – you are being fooled into taking a finance deal with either a higher interest rate than they are telling you or it may be that you are actually going to be borrowing more than they are leading you to believe!

I am not saying for one minute that a car salesperson would openly lie about figures like this. It’s more likely that they would only tell you what you need to know, or be economical with the truth by only answering your direct questions.

Another common tactic is where they say something like “we offer very competitive finance” without actually telling you the interest rate (Flat rate) of their loan.

So, when you are negotiating a deal you will get to the stage where you know the Amount you have to borrow. The salesperson might then say something like “that will cost you £xxx per month over 3 years or £xxx per month over 5 years, which is better for you?” In this case you need to check to see what interest rate they are trying to charge you…

Calculate loan rates

Do this when you know the Amount, Term and monthly Repayments of the loan:

Step Buttons to press on calculator Explanation in words
1 Term ÷ 1200 = Divide the Term by 1200
2 M+ Store the answer in your calculator’s memory (or write it down, for later!)
3 Repayment ÷ Amount = Divide the Repayment by the Amount
4 x Term Multiply the answer by the Term
5 - 1 = Subtract 1 from the answer
6 ÷ MR = Divide the answer by the result of step 1 above

Example

Suppose you are borrowing £10000 over 3 years (36 months) and you are told the monthly Repayment is £330

Step Buttons to press on calculator Calculator shows
1 36 ÷ 1200 = 0.03
2 M+ Store or write down the answer for later
3 330 ÷ 10000 = 0.033
4 x 36 = 1.188
5 - 1 = 0.188
6 ÷ MR (or ÷ 0.03) = 6.2666666

So when you calculate the interest for this loan, it works out at 6.27% interest (Flat rate). Is that what the salesperson is telling you? If not, then again, something is wrong… you are not being told the whole truth. It may be that they have “misquoted” the interest rate or that you are actually going to be borrowing MORE than you are being led to believe!

In any event, is it a good rate? How does it compare with current loan rates? Remember, you are not comparing this with the APR of a bank or personal loan – that will be about double. You need to find out the sort of interest rates that are currently being offered for personal loans – this is constantly changing, so we can’t tell you. Just search the Internet for personal loans. You will only find APR figures but it is reasonable to half the APR rate to find the current Flat rate.

If you want to be more precise - just search the internet using your favourite search engine. You should search for “personal loan calculator” and you will find plenty of reputable websites (banks, finance companies etc) where you can enter an Amount and a Term and it will show you the APR and the Repayment. You can then enter the Amount, Term and Repayment into our Car Loan Calculator and it will tell you what the Flat rate is for that loan.

You can then compare the Flat rate of the loan you are being offered by the car salesperson to what you know typical rates are. Obviously, if the rate is not good – don’t do the deal!

Getting a loan at a higher interest rate than necessary means that you are paying more than necessary and the dealer is making more money out of you than necessary.

Another situation you might find yourself in is where the salesperson isn’t exactly clear about how much the balance to change figure is, rather than tell you they might just say what the repayments will be…

Calculate loan amount

Do this when you know the Rate, Term and monthly Repayments of the loan. This is also a very common situation: you get told how much they will allow you for your part exchange car and they proceed to work out a deal, telling you how much it will cost you per month – without actually telling you how much you will end up borrowing. A surprising number of car buyers only focus on the monthly repayment at this stage… very dangerous!

Step Buttons to press on calculator Explanation in words
1 Term ÷ 1200 Divide the Term by 1200
2 x Rate Multiply the answer by the Rate
3 + 1 = Add 1 to the answer
4 M+ Store the answer in your calculator’s memory (or write it down, for later!)
5 Repayment x Term Multiply the Repayment by the Term
6 ÷ MR Divide the answer by the result from step 4 above

Example

Suppose the loan is over 3 years (36 months), the flat rate is 4.83% and you are told the monthly Repayment is £318

Step press Calculator shows
1 36 ÷ 1200 = 0.03
2 x 4.83 = 0.1449
3 + 1 = 1.1449
4 M+ Store or write down the answer for later
5 318 x 36 = 11448
6 ÷ MR (or ÷ 1.1449) = 9999.1265

So when you calculate the amount you are borrowing for this loan, it works out at £9999.13 Is that what the salesperson is telling you, or what you expected? If not, then again, something is wrong… This figure is effectively the “balance to change” figure – the difference between what you are getting for your car and what you are being charged for your new car (assuming you haven’t put any cash into the deal). Add this Amount to the Trade price for your car… the resulting figure is what you are paying for your new car and you will easily see what, if any, discount you are getting.

If you are borrowing more than you thought it obviously means that you are not getting as good a deal as you thought… you are not getting much discount on the car you are buying. You can do better!

Calculate the term of a loan

The final possibility is the least likely one – where you don’t know what Term the loan is over. It is sometimes worth checking though, as a loan can be arranged over any period of time, it doesn’t have to be exact years, and an extra month or two on the Term means you are paying more than you thought…

Step Buttons to press on calculator Explanation in words
1 Amount x 0.000833333 = Enter as many 3’s on the end as you can
2 x Rate = Multiply the answer by the Rate
3 M+ Store the answer in your calculator’s memory (or write it down, for later!)
4 Repayment – MR = Subtract the result of step 3 above from the Repayment
5 MC then M+ Clear calculator’s memory then store the answer (or write it down, for later!)
6 Amount ÷ MR = Divide the Amount by the result from step 5 above

Example

Suppose you are borrowing £15000 at 4.83% and you are told the monthly Repayment is £465.78

Step press Calculator shows
1 15000 x 0.0008333 = 12.4995
2 x 4.83 = 60.3725
3 M+  
4 465.78 – MR (or - 60.3725) = 405.4074
5 MC then M+ Store or write down the answer for later
6 15000 ÷ MR (or ÷ 405.4074) = 36.9998

So when you calculate the term of this loan, it is 37 months. Is that what you thought? If not, then again, something is wrong…

It may be that another dealer is quoting a slightly higher repayment for exactly the same loan… so this finance, where the repayments are less, seems better. However, the other dealer may be quoting over a Term of 36 months whereas this loan is over 37 months – that extra month has just cost you £465.78… you have just paid £465.78 more than you thought for this car!

Conclusion

Apart from a house, buying a car is probably the most expensive purchase you will ever make… don’t just accept whatever a car salesperson tells you about the finance – double-check the figures because it’s so easy to be misled. Tell the salesperson to leave you alone for 10 minutes while you “work out your finances” (or whatever) and do the calculation yourself. You will only have to do one of the above calculations: -

Remember there are 4 numbers – Amount, Rate, Term and Repayment. Just take the 3 numbers you are sure of (or in fact, ANY three of the four numbers!) and work out the missing one.

If your calculation produces an unexpected result tell the salesperson what you have found and get them to “reconsider” or do better. Do not accept a bad finance deal – if you do, you may as well give up, lie down and ask them to fleece you… they are doing anyway!

So, when the time comes, check and double check the finance deal you are being offered but, how do you get to that point? How should you handle car salespeople and get them to do you the best deal? We will see in the next section – but first, you need to examine your spending power…

The next section explains how you can check your buying power...


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