A car loan is a structured way to spread the cost of a vehicle over time. You borrow a principal amount, pay interest on the outstanding balance and gradually repay via equal instalments (amortisation). Some products include fees and optional balloons (a lump sum owed at the end), which change the pattern of cash flows and the total cost.
Core concepts
- Principal: the amount you borrow after deposit, trade‑in equity and on‑road costs.
- Interest: charged each period on the remaining balance.
- Amortisation: each payment covers interest first, then reduces principal.
- Fees: application and monthly fees increase the amount financed and the effective cost.
- Balloon: an agreed residual owed at the end; lowers regular payments but must be settled later.
How repayments are calculated
Repayments are set so the discounted present value of all payments (plus any discounted balloon) equals the amount financed. With a positive balloon, regular repayments are lower, but you carry a lump sum to the end. Extra repayments reduce total interest and can shorten the schedule.
Embedded calculator
Use the live calculator below to model your scenario. Adjust price, deposit, term, rate and balloon to see how the schedule changes.
Comparison rates explained
A comparison rate converts fees and the timing of cash flows into a single annual number for comparison. It’s not flawless—different fee structures and balloons mean the published comparison rate is indicative—but it’s a better benchmark than headline rates. Our app shows an approximate comparison rate based on your inputs, including fees and balloons.
When to use a balloon
- Cash‑flow smoothing is important and you have a clear end‑of‑term plan (savings, sale or refinance)
- You keep vehicles on a fixed cycle and track residual values carefully
Avoid oversized balloons on rapidly depreciating cars; negative equity risk increases. For novated and finance lease contexts, residuals are often set against guideline percentages by term—see the ATO residual value matrix for typical reference points.
Examples
Try a 60‑month term at 7.5% with and without a 30% balloon. Notice how the monthly repayment falls with a balloon but total interest paid rises. Add $50/week extra repayments and watch total interest drop and the end balloon stay intact.
Practical checklist
- Use a deposit or trade‑in equity to lower LVR and improve pricing
- Pick the shortest term that keeps payments comfortable
- Compare total cost using comparison rates and our visualisations
- Keep balloons modest unless your end‑of‑term strategy is certain
Bottom line
Car loans are predictable once you understand the mechanics. Structure the loan to match your cash flow and risk tolerance, and always compare on total cost—not just the smallest fortnightly figure.