Interest rates are the extra cost you pay to borrow money from the bank. In a way, this is the bank's fee for lending you the money. These rates are expressed as a percentage of the loan amount and impact the total cost of your loan.
For example, if you borrow £10,000 with a 5% interest rate, you'll pay back less than if the rate was 7%. The lower the interest rate, the less you'll end up paying over the duration of the loan.
Not everybody will be offered the same interest rate for a loan to buy a car. The rate can change based on a number of factors:
Credit score: If you have a good credit score, you’re likely to be offered a lower interest rate. This is because lenders see you as a lower risk.
Economic climate: Interest rates change depending on the state of the economy. During times of economic uncertainty, lenders may decide to increase rates.
Loan terms: Sometimes, shorter-term loans have lower interest rates than longer-term ones.
Repayment terms are the rules around how long you have to pay back your loan and how those payments are structured. They directly impact how much you pay each month and the total cost of your loan.
There are two main types of repayment terms:
Fixed-rate loans
With a fixed-rate loan, your interest rate stays the same for as long as you make repayments. This means your monthly payments are predictable and won’t change, making it easier to budget. For example, if you take out a £10,000 loan with a 5% fixed rate over five years, your monthly payment will remain the same until the loan is paid off.
Variable-rate loans
With a variable-rate loan, the interest rate can change over time based on market conditions. This means your monthly payments can go up or down. While variable rates can start lower than fixed rates, they come with the risk of increasing, which could make your payments higher further down the line.
Choosing your ideal repayment term will depend on your financial situation and how much stability you want in your monthly payments. Fixed rates offer predictability, while with variable rates, you may have a chance of saving money if interest rates go down.
Figuring out what you’ll owe on a monthly basis for a £10,000 bank loan can be simple. Here’s a straightforward way to understand it. To calculate your monthly payment, you’ll need:
Loan amount
Annual interest rate
Loan term
The easiest way to calculate your monthly payment is by using an online loan calculator. You can find these tools on most bank websites. Just enter the amount you wish to borrow, interest rate and loan term, and it will do the maths for you. But here’s a basic example to help you understand:
Example calculation
Loan amount: £10,000
Interest rate: 5% per year
Loan term: 5 years (60 months)
Quick estimate method:
Multiply the loan amount by your annual interest rate to find the yearly interest: £10,000 × 0.05 = £500 per year.
Divide this by 12 to find the monthly interest: £500 ÷ 12 = £41.67 per month.
Add the monthly interest to the principal repayment: £10,000 ÷ 60 = £166.67 per month (principal repayment) + £41.67 (monthly interest) = £208.34 per month.
So, for a £10,000 loan at 5% over 5 years, your monthly payment would be roughly £208.34.
Realistic example:
16.9% interest rate over 3 years (36 months)
Annual interest: £10,000 × 0.169 = £1,690
Monthly interest: £1,690 ÷ 12 = £140.83
Principal repayment: £10,000 ÷ 36 = £277.78
Total monthly payment: £277.78 + £140.83 = £418.61
16.9% interest rate over 7 years (84 months)
Annual interest: £10,000 × 0.169 = £1,690
Monthly interest: £1,690 ÷ 12 = £140.83
Principal repayment: £10,000 ÷ 84 = £119.05
Total monthly payment: £119.05 + £140.83 = £259.88
These examples show how different your monthly payments can be with different interest rates and loan terms. If you need exact figures, an online loan calculator can do the job quickly and accurately, just like our handy car finance calculator.
What can affect the total cost of your loan?
Your loan costs can go beyond just interest rates. Look out for fees like application or processing fees, which can add to the total cost. Missing a payment can also lead to penalties, which will increase your costs. Also, some banks may charge a fee if you pay off the loan early. These factors can bump up your monthly payments and the overall loan cost.
Remember, always check the fine print and ask about any extra charges before you take out a loan to ensure it makes the most sense for you and your financial goals.
Making sure your loan payments fit into your budget is perhaps the single most important thing you can do before committing to a bank loan. Here’s how to do it.
✔ Know your income
Start with your total monthly income after taxes. This gives you a clear picture of the amount you have to work with.
✔ List your expenses
Write down all your monthly expenses like rent, utilities like water and electricity, food and entertainment. Don’t forget occasional costs like car maintenance or insurance.
✔ Calculate loan payments
Just like we showed you, work out your monthly loan payment based on the loan amount, interest rate and term.
✔ Prioritise your loan
Treat your loan payment like a must-pay bill, no different from rent, council tax or utilities. Make it one of the first things you budget for each month.
✔ Set aside more than you need
If you can, try to put a bit extra away each month for unexpected expenses. This way, if something pops up, you’re less likely to miss a loan payment.
✔ Adjust your spending
If your loan payment is higher than expected, look for areas where you can cut back, like takeaways or an entertainment subscription you don’t use much.
Prioritising your loan payments helps you avoid missing them, which can hurt your credit score and make it harder to get loans in the future. Careful budgeting and making your loan a priority means you can manage your finances smoothly and avoid any hiccups.
Taking out a bank loan can be a shrewd move and a smart way to make big purchases without emptying your savings, but it's important to be aware of everything involved in the process.
One of the biggest risks is missing a payment. This can lead to late fees and damage your credit score, making it harder to borrow money in the future. If you can’t keep up with your payments, your credit score will take a hit and that will impact your ability to get loans, credit cards, and even things like renting a property.
A loan also adds a monthly expense to your budget, which can lead to financial stress if it’s not managed well. That said, you can successfully build your credit score by taking out a loan and making each payment on time.
The best thing you can do to minimise the risks from the start is to only borrow what you can comfortably pay back. Make sure your monthly payments fit into your budget without stretching it too far. Setting up reminders or automatic payments can help you avoid missing due dates, and it’s also a good idea to create an emergency fund.
Having some savings set aside can help you cover loan payments if something unexpected happens. Regularly reviewing your budget and adjusting your spending as needed means you’ll always be able to make your loan payments.
Ready to finance your next car?
At Oodle, we’re here to make financing your new car as simple and stress-free as possible. With competitive rates, flexible terms and a friendly team ready to help make it happen, a new set of wheels is just a few clicks away.
