The monthly payment formula
A standard amortising loan uses one formula: payment equals P × r ÷ (1 − (1 + r)−n), where P is the amount borrowed, r is the monthly interest rate (APR divided by 12, expressed as a decimal) and n is the number of months. Early payments are mostly interest; later ones are mostly capital. The calculator above uses this formula. Treat APR-to-monthly conversion as a close approximation, since lenders' exact calculations can differ slightly.
Using the example inputs, borrowing £18,000 over 48 months at 7.9% APR gives a payment of roughly £439 and about £3,052 of interest in total. The example figures are illustrative, not market rates.
Finance types compared
| Type | Own it at the end? | Final lump sum | Mileage limits | Who carries resale risk |
|---|---|---|---|---|
| Hire Purchase (HP) | Yes, after the final payment and any option-to-purchase fee | No | No | You |
| Personal Contract Purchase (PCP) | Only if you pay the optional final payment | Yes, based on a guaranteed future value | Yes, excess charged | Lender, unless you buy the car |
| Personal loan | Yes, from day one | No | No | You |
| Personal Contract Hire (lease) | Never | No | Yes, excess charged | Leasing company |
| Cash | Yes | No | No | You, plus the return your savings could have earned |
How PCP changes the maths
With PCP, part of the price is deferred to an optional final payment, often called a balloon. The monthly payment covers the difference between the amount borrowed and the balloon, plus interest on the whole balance. The formula becomes payment = (P − B ÷ (1 + r)n) × r ÷ (1 − (1 + r)−n), where B is the balloon. Payments are lower, but you pay interest on money you have not yet repaid, and you do not own the car unless you settle the balloon.
Why the calculator counts interest, not repayments
If you add all your finance repayments to depreciation, you count the car twice: repayments mostly return the purchase price, and depreciation measures how much of that price you lose. The honest cost of borrowing is the interest and fees. The main calculator therefore adds interest, averaged over the term, to depreciation, while still showing the monthly payment so you can check affordability.
Reading a finance quote
- Representative APR. In the UK, credit adverts must include a representative example. Your own rate may differ.
- Total amount payable. The clearest single figure for comparing deals.
- Fees. Look for arrangement and option-to-purchase fees.
- Mileage and condition. On PCP and leases, excess mileage and damage beyond fair wear and tear are charged at the end.
- Early exit. Under the Consumer Credit Act 1974 you can settle early, and on HP and PCP you can usually end the agreement voluntarily once you have paid half the total amount payable.
Spreading the cost: pros and cons
Pros
- Keeps savings intact for emergencies.
- Predictable monthly outgoings.
- PCP and leasing shift resale risk to the lender.
Cons
- Interest raises the total cost.
- Low monthly figures can tempt you into a pricier car.
- Negative equity if the car is worth less than you owe.
Before you sign
Compare the total amount payable across at least two lenders. Check that the payment fits your budget alongside fuel, insurance and servicing, not just on its own. Read the mileage and return conditions twice. For impartial guidance on borrowing, see MoneyHelper, and check that any lender or broker is authorised on the FCA Financial Services Register.