Car Loans

How to Calculate Your Car Loan Interest Rate

Written by:

Georgia Matthews


June 4, 2020

Last updated

August 12, 2022

Reading time

5 minutes

Georgia Matthews

Georgia Matthews is a contributing Writer at Oiyo. She is currently studying a dual Bachelor of Laws / Bachelor of Arts (majoring in history and psychology) from the University of Queensland. Georgia has worked in a few law firms during her studies and is currently working in a corporate law firm. She is most passionate about writing, history, and travelling.

Calculating your car loan interest rate can be tricky at the best of times. Lenders may not always be entirely upfront with the way their interest rates operate, or what is included in them. 

So, don’t get caught with an unreasonable interest rate that you can’t afford. Keep reading Oiyo’s comprehensive guide to interest rates so that you can be better informed about your car loan.

What is a car loan interest rate?

Interest rates on car loans are relatively simple. They are no different from the interest you pay on your home loan, for example. Essentially, interest is a percentage of your loan that is charged in addition to your monthly repayments. Think of it as a small fee charged by the lender in return for providing the money to you upfront. 

Lenders offer very competitive interest rates, so it’s important to do your research to find the best deal. A good interest rate can save you thousands over the life of your loan. There are many factors that affect interest rates, as discussed below. First, however, we’ll go through the different types of interest rates so you can get your head around the jargon.

Fixed vs variable interest rates

First of all, note the difference between fixed and variable interest rates. A fixed rate denotes an agreed upon car loan interest rate that will not change over the course of the loan. on the other hand, a variable interest rate is subject to change. Changes in the variable interest rate will depend on the current loan market. As a result, you could be paying higher interest rates for some repayments, and lower for others. What will work best for you is entirely dependent on your individual financial situation. Speak to your lender and ask what they would recommend when applying for a car loan. 

Base vs comparison interest rates

A base interest rate is solely a percentage of your loan that is charged on top of your loan repayments. Base interest rates are usually just called the interest rate, so you can assume that when lenders mention interest rates all they are talking about is the percentage of the loan. Alternatively, they are sometimes referred to as advertised interest rates. 

On the other hand, comparison interest rates are designed to allow you to compare the true cost of the loan. In addition to the base interest rate, comparison interest rates are inclusive of additional fees. To get an idea, a few typical fees that lenders may charge and include in their comparison rate are as follows:

  • Account keeping fees;
  • Servicing fees; 
  • Car insurance fees; or
  • Application or establishment fees.

Comparison rates & fees

The fees included in a comparison interest rate will generally only be ongoing fees that are charged with each repayment instalment. A regular exception to this is the application or establishment fee. Comparison rates will not include other one-off fees, or fees triggered by certain events. Examples of these sorts of fees include:

  • Exit and discharge fees;
  • Early repayment fees;
  • Redraw fees; 
  • Late repayment fees; or 
  • Stamp duty. 

Bear in mind that these lists above are merely guides. What is included and not included in the comparison interest rate varies significantly between lenders and loans. Speak to your lender to gain clarity on what ongoing fees they charge and include in their comparison rate. 

Lenders are legally required to advertise their car loan comparison rates. Further, the formula for calculating the comparison interest rate is regulated by the Consumer Credit Code. All Australian financial institutions and lenders use this same formula. 

How do interest rates affect my car loan?

Interest rates are one of the most important factors of a car loan (though not the only one). They will significantly affect how much you pay back on your loan. 

Take this table below, for example. Evidently, all the factors can affect the overall cost of your car loan. However, we’re focusing on interest rates for the time being. Each loan below is for the same amount, over the same term and with monthly repayments. The only factor that has been changed is the interest rate. See how even the smallest change (such as 0.1%) in the interest rate can affect the overall cost over the life of the loan?

Loan amountInterest rateLoan termMonthly repaymentsTotal interest paidOverall cost 
$10,00012%5 years$222.44$3,346.67$13,346.67
$10,00010%5 years$212.47$2,748.23$12,744.23
$10,0006%5 years$193.33$1,599.68$11,599.68
$10,0005.90%5 years$192.86$1,571.80$11,571.80

*Note: all monetary values have been rounded to two decimal places.

What factors will influence my car loan interest rate?

Loan term and frequency of repayments

The shorter the loan term, the faster you will repay the loan. Your monthly repayments will be more expensive, but you will save money in interest payments as you will accrue less interest. On the other hand, a longer loan term will mean you pay less per instalment but more in interest over the life of the loan. The term of your loan will be dictated by your ability to repay it. 

Repayment instalments are usually made monthly, fortnightly or weekly. How frequently you make repayments may speed up or slow down your loan term. However, the frequency of repayments usually won’t have as significant an effect on the interest rate as the term will.

Credit score

A credit score is a number between 0 and 1200 that is calculated from the information in your credit report. This number represents your financial habits. Your credit score is affected by a variety of factors. Such factors include your spending habits, your current debts, and how reliable you repay other loans. Essentially, your credit score will reflect how well you manage your debt. The higher the number, the better your credit score and vice versa. Lenders will typically conduct a credit check to ensure that you are a reliable borrower. 

Better credit scores will qualify you for a better car loan interest rate. This is because lenders will be more willing to give you better deals as you appear a more reliable borrower. If you don’t have a good credit score, you can work to rehabilitate it by paying off existing debts and making all repayments on time.

If you’re unsure what your credit score is, you can check using one of these three websites. They are all approved by the Australian Government and therefore are required to provide you with a free credit report once a year. 

Personal financial circumstances

In addition to looking at your credit score, lenders will often conduct a small investigation into your personal financial circumstances. They will look for factors not included in your credit score, such as your savings, income, lifestyle, and borrowing capacity. 


Car loans are typically offered as secured car loans or unsecured car loans. A secured loan requires you to offer an asset as security against the loan. In the case of car loans, this will usually be your car. Though you’ll benefit from lower interest rates and fees with a secured loan, the drawback is that the lender will be able to repossess your car if you default on repayments. Secured loans are a good option if you would like to qualify for a better car loan interest rate.

Alternatively, unsecured car loans do not require an asset as security. As the lender won’t be able to repossess your car if you fail to make your repayments, you will receive higher interest rates and fees. Your lender will also ensure that you are not a financial risk to increase their chances of receiving all the money back.

At the time of writing, the average interest rates for secured car loans range from 5% to 10%. The average is up to 15% for unsecured car loans.  

Make and model of the car

Though less common, occasionally the vehicle that you are purchasing with your loan can affect the interest rate. For example, environmentally-friendly vehicles (aka green cars) can qualify you for a lower interest rate. New cars may attract lower interest rates as they are less likely to have mechanical issues.

Balloon payments

Your regular repayments can be reduced through the use of a balloon payment. A balloon payment is a lump sum owed at the end of your loan term. Repaying a significant amount of the loan back (for example, 40%) at the end of the term means you will only have to repay 60% in your monthly repayments. Your repayments will be more manageable, but more interest will accrue over the life of the loan. This is because the entire loan amount will accrue interest.

How to calculate the interest rate

Manual calculations 

There are many calculators online able to accurately calculate a car loan interest rate for you. However, if you feel more comfortable doing the maths yourself or just want to double check the figure that the calculator is generating, this is the formula you’ll need: 

Interest payment = outstanding balance x (interest rate / number of payments a year) 

Working example

So, say that you borrow $13,000 with a 12% base interest rate, and you make monthly repayments. Note that 12% is represented as a percentage, meaning that it will appear numerically as 0.12 in the equation. The equation would then look like this:

Interest payment = $13,000 x (0.12 / 12)

= $13,000 x 0.01

= $130

Therefore, the interest payment for your very first monthly repayment in this case would be $130. 

As you continue to pay off the loan, your interest payments will reduce as your outstanding balance reduces. To calculate the outstanding balance for further repayments, use the below formula and substitute it in for the outstanding balance figure.

Outstanding balance = principal – (repayment – interest cost of preceding repayment

Car loan calculators

Now that you know the basics of car loan interest rates, you’re able to calculate the overall cost of the car loan. As shown in the table above, car loan calculators generally consider four factors in their calculations. These are the loan amount, the interest rate, loan term and frequency of repayments.

You’re able to calculate the interest yourself using the formula above, but car loan calculators make the maths easier. Feel free to alter the figures that you enter into the calculator to find a car loan that is affordable for you. Once you do this, then you can begin researching to locate a lender that suits you.

For our recommendations on calculators, click here.

How can I qualify for a lower car loan interest rate?

Finally, to sum up, here is a simple list to suggest how you can qualify for a lower car loan interest rate:

  • Do your research and compare multiple lenders and loans;
  • Pick a secured loan rather than an unsecured loan;
  • Choose to repay your car loan over a shorter term;
  • Consider purchasing a ‘green vehicle’, or see if you lender will offer a reduced interest rate for a new car as opposed to a second-hand car;
  • Work to improve your credit score by paying off debts and making repayments on time; and
  • If you can afford to, opt against balloon payments.

Of course, interest rates for car loans are not the whole picture. Read our guide to car loan calculators to see how other factors affect your car loan. Alternatively, you can find out more about bad credit car loans

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