Car Leasing Blog

This article is mainly aimed at car finance, but can mostly applied to different types of fixed interest rate loan.

Hire Purchase is the most common type of finance applied to cars, and it is important that you understand how it works and how to calculate payments. This way you can understand how much you actually repay monthly and over the term of the contract.

For the purposes of the example, we will assume a £12,000 vehicle over a 4 year contract (48 months) and an interest rate of 5% base.

Step 1 : Remove the bits you wont repay

Nominally this is the deposit (and possibly a baloon payment, but lets leave that for now)

So lets assume a 10% deposit giving £1,200.

This leaves an amount to finance (ATF) of £10,800

note. The deposit could also be any part exchange money you have recieved.

Step 2: Work out the annual interest

Take the ATF and calculate the annual interest from the base rate like to

10,800 multiplied by 5% = £540

This is the amount you will repay for the facility annually.

Step 3 : Work out the total interest

This is the part often overlooked. Take the annual interest and multiply by the number of years the contract will last for. (in this case 4)

Method 1: £540 multiplied by 4 = £2160

Method 2 : (5% * 4)*ATF = 20% * 10,800 = £2160

Step 4: Add the interest to the ATF

10,800 + 2160 = £12960.00

Step 5 : Divide the total amount into the number of monthly payments

£12,960 divided by 48 = £270 per month

There you go, thats your payment. Next time you get a quote from the dealership you will now be able to work it backwards and calculate how much its costing you.

Enjoy, see you next time

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