Loan Term Optimiser
Compare total interest costs across two loan terms to see the trade-off between payment size and total cost.
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What this tool does
This calculator compares two different car loan terms using the standard amortisation formula. The user enters the car price, deposit, APR and two term lengths (in months); the tool computes the monthly payment and total interest paid for each term, then shows the difference in total interest cost. The calculation assumes fixed-rate loans with equal monthly payments and does not account for fees, taxes, or early repayment charges.
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How Loan Term Optimiser works
This tool compares two loan scenarios side-by-side. For each term, it calculates the monthly payment required to amortise the financed amount (car price minus deposit) at the given APR, then multiplies the monthly payment by the number of months to find the total repaid. Subtracting the principal from the total repaid yields the total interest for that term. The tool then reports the difference in interest between the longer and shorter terms, alongside the monthly payment for each.
The formula
The monthly payment for a fixed-rate instalment loan is M = P × [r(1 + r)n] / [(1 + r)n − 1], where P is the principal (financed amount), r is the monthly interest rate (APR ÷ 12 ÷ 100), and n is the number of months. Total interest is then M × n − P. The calculator applies this formula to both the shorter and longer term, then subtracts the short-term total interest from the long-term total interest to show the additional cost of the longer loan.
Where this method is most accurate
This calculation assumes a fixed-rate instalment loan with equal monthly payments beginning one month after the loan is drawn, no balloon payment, no payment holidays, and no fees. It does not incorporate arrangement fees, early settlement penalties, payment-protection insurance, negative equity from a trade-in, or jurisdiction-specific charges. Many real-world finance agreements include such features, which will alter the effective cost.
What this tool does not do
The tool does not recommend a particular term length, assess affordability, or account for the time value of money or opportunity cost of capital. It shows only the arithmetic difference in interest; whether the lower monthly payment of a longer term is preferable depends on cash-flow constraints and alternative uses for the freed-up funds, which are outside the scope of this calculator.
Disclaimer
This calculator is provided for educational purposes only. It performs mathematical operations on user-supplied inputs and does not constitute financial advice or a recommendation to enter into any loan agreement. Actual loan terms, costs and eligibility are determined by lenders and may vary.
Questions
- Why does the longer term always cost more in interest?
- Interest accrues on the outstanding balance each month. A longer term means more months for interest to accumulate, even though the monthly payment is lower. The total amount repaid is higher because the principal is paid down more slowly.
- Does this calculator include arrangement fees or early repayment charges?
- No. It calculates interest only, using the standard amortisation formula. Lenders may charge arrangement fees, documentation fees, or penalties for early settlement, which are not included in this calculation.
- Can I use this to compare hire purchase and PCP?
- Only if both agreements are structured as fixed-rate instalment loans with no balloon payment. PCP agreements typically have a large optional final payment, which changes the cash-flow profile and is not modelled by this tool.
- What happens if I enter a deposit larger than the car price?
- The calculator will return an error. The deposit must be between zero and the car price; a deposit equal to or greater than the price means no loan is needed.
- Why is the monthly payment higher on the shorter term?
- The same principal is repaid over fewer months, so each monthly instalment must be larger. The trade-off is that less interest accrues overall because the balance is paid down faster.
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Sources & Methodology
The tool uses the standard fixed-rate amortisation formula M = P × [r(1 + r)^n] / [(1 + r)^n − 1] to compute monthly payments for each term, then calculates total interest as (M × n) − P. The difference between the two interest totals is reported as the extra cost of the longer term. This formula is documented in financial mathematics textbooks and industry references.
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