Brits are no strangers to car finance, with the latest data revealing around 90% of the 2.3 million new cars sold in an average year are financed through an FLA member. Finance can be a great way to unlock more spending power. However, before you apply it’s important to develop a good understanding of how the cost of car finance works.

What many people don’t realise is that the cost of car finance can vary significantly from motorist to motorist. Every applicant is different, and creditors will always adjust the cost of car finance accordingly. So which factors affect the cost of finance? Read on for our expert guide, including how to calculate the factors that affect the cost of car finance.

Cost of car/loan amount

The main factor that determines the cost of car finance is the overall price of the car and the total loan amount. This bottom line figure is what determines everything from monthly repayments to annual interest. While it can be tempting to focus on the price of the car itself it’s important to understand this isn’t the only factor at play. Interest rates, as well as extra fees and charges, can have a big impact on the overall cost of your loan. Before committing to a car loan, it’s always best to crunch the numbers using a cost of car finance calculator.


Cash deposits are a major contributor as they directly affect the cost of the car and the loan amount. Deposits are taken off these figures which lowers the amount you need to borrow and brings down the total cost of car credit. For a quick and easy overview, check out our cost of car finance calculator.  

Repayment term

Like home loans, repayment terms will have a big impact on the cost of your car credit. For example, if you plan to settle your car loan within two years, your monthly repayments will be 50% more than with a four-year repayment plan. Opting for the shortest repayment term possible is a good way to slash your interest expenses. Basically, the faster you pay off your loan the less interest you’ll be paying.

Interest rate

Creditors always charge interest rates on loans and these can have a significant impact on the total amount you pay back. Interest is calculated on the total amount you borrow, which means the higher the loan the more interest you’ll pay. A typical Annual Percentage Rate (APR) is 6.9%, which includes your interest rate and any applicable fees. This means that on a £10,000 loan across three years, you’ll pay 36 monthly payments of about £307, totalling £11,065. This includes the £10,000 you borrowed and £1,065 in interest and fees.

Your monthly payments are set from the start of the agreement and stay the same throughout. However, at the start you’ll be paying more of the interest and less of the loan balance. As you get towards the end of the term, you’ll be repaying less interest and more balance.

Before signing a contract you’ll also want to determine whether your interest rate is fixed or variable. There are pros and cons to each, usually dependent on your personal preferences and financial situation.  

Credit rating

Credit ratings are incredibly important when applying for a car loan. They offer lenders an overview of what your spending habits are like and how responsible you are with money. This allows lenders to calculate the risk factor of offering you a loan and empowers them with the data to adjust interest rates accordingly. The risk is lower for applicants with good credit scores which means lenders are more inclined to offer lower interest rates. In comparison, applicants with lower credit scores are deemed higher risk and may be penalised with higher interest rates.

We always recommend starting with ‘soft’ credit checks as they won’t impact your credit score. Unlike hard checks, they don’t leave a trace on your credit score and aren’t visible to potential lenders. Take out too many hard credit checks and you risk presenting yourself as a volatile and credit-hungry applicant. 

Type of car finance you’re going for

The type of car finance you’re looking to take out will also affect the overall cost of your loan. Hire Purchase (HP) loans are one of the most popular models and involve paying off the full value of the car in monthly instalments. The loan is secured against the vehicle, meaning you won’t officially own the car until you’ve paid off the last instalment. You don’t need to put a deposit down on many HP loans but it will help lower your monthly repayments and overall interest if you do.

Personal Contract Purchase (PCP) loans are another popular credit option. Designed to be more flexible than HP loans, they’re based on a long-term ‘rental’ model that usually spans over three to five years. During this time, you make payments that allow you to use the car over the agreed period. PCP loans often come with mileage limits and damage penalties so it’s important to understand all the fine print before you sign on. When your contract comes to an end, you’re offered the option of returning the car and upgrading to a new vehicle on a similar contract or purchasing it outright with a ‘balloon payment’.

Balloon payments are an interesting concept as they can be financially challenging in themselves. At My Car Credit we understand how difficult it can be to find the cash for car loans which is why we developed a special Balloon Payment Finance plan designed to help you own a car at the end of a PCP contract.

Extra fees and charges

Don’t overlook the additional fees and charges that can often come with car credit. These can include brokerage fees, monthly account-keeping fees, statement fees, late payment fees and penalty charges if you choose to terminate your loan early. All can contribute to the overall cost of your car loan and it’s important to know exactly what you’re paying for.

Securing the best car loans

Need help securing a car loan? At My Car Credit we comb through more than 25 trusted car finance lenders to find you the best deals. We also have a lightning-fast cost of car finance calculator that can be used to estimate your repayments in a matter of clicks.

As part of Evolution Funding, we’re backed by one of the largest motor finance brokers in the UK and have access to the most comprehensive panel of car loan companies. What does this mean for you? It boosts our chances of finding you the best possible car finance deals and ensures your repayments and interest rates are as low as possible. To find out more, get in touch with our friendly team today on

Rates from 9.9% APR. Representative APR 12.4%

Evolution Funding Ltd T/A My Car Credit

My Credit Rating


  • You are a home owner
  • You have been on the electoral role for a long period of time
  • You have current credit arrangements and mortgage with no defaults
  • You have no CCJs, credit arrears or missed payments
  • You rarely apply for credit
  • You are employed or self-employed


  • You are on the electoral role
  • You are a home owner or long standing tenant
  • You have a stable employment history
  • You have current credit arrangements with occasional missed payments
  • You have no CCJs


  • You are or have recently been on the electoral role
  • You may have recently changed address
  • You may have occasional missed payments
  • You may have an old CCJ
  • You may have regularly applied for credit


  • You may have had frequent changes in address
  • You may not be traceable on the voters roll
  • You may have exceeded credit card limits
  • You may have missed payments on current agreements
  • You may have had a CCJ in the past


  • You may not be traceable on the voters roll
  • Your credit cards are over their limits
  • You have recent CCJs
  • You may have been refused credit elsewhere
  • You may be in a debt management plan

X monthly repayments of

Typical rate

Loan amount

Total payable




*for illustration purposes only

No impact on your credit score*

Representative Example

Borrowing £7,500 at a representative APR of 12.4%, annual interest rate (fixed) 12.36%, 47 monthly payments of £196.44 followed by 1 payment of £206.44 (incl. estimated £10 option to purchase fee), a deposit of £0.00, total cost of credit is £1,939.12, total amount payable is £9,439.12.

Evolution Funding Limited, trading as My Car Credit, is a credit broker and not a lender.

Please ensure you can afford the repayments for the duration of the loan before entering into a credit agreement.

*Initial application is a soft search. Should you progress, some lenders may perform a hard search on your credit file.

Require more help?

Got a question you can’t find the answer to, or need some advice and guidance around taking out car finance? Our Car Credit Specialists are friendly, experienced, and here to help so get in touch today!