Understanding the 'Total Interest Paid' when taking our Finance

Total interest paid stands for the actual amount of interest you pay on a loan over the entire loan duration. It is the amount which you pay, as interest, over and above the total principal owed.

Example 1:

Suppose you take a loan of £10,000 for a period of 36 months at 5% interest rate. As an example, your monthly installment will be around £299.71. Over the 36-month period, you will end up paying around £10,789 as total amount borrowed (£299.71 x 36). As you can see, you are paying £789 over and above the principal amount. This amount is the total interest paid.

Total Interest Paid in detail

The above example is a simple illustration. In reality loans vary dependent on the type of loan you take. Car loans for example, have several other elements, such deposit, administration fees, and any other fees charged by dealers. In case you purchase a car under PCP finance, it will also have additional items such as GMFV. In such a scenario, it can be quite a challenge to calculate the total interest paid. Let's look at car loans in further detail.

Example 2:

Suppose you want to buy a new Volkswagen Beetle Cabriolet for £17642 under PCP finance. You are being offered a GMFV of around £5822. You need to pay a deposit of £1000 and administrative fees of £185. Interest rate is 10.6%. You've been given a monthly installment figure of £282.30 for 48 months. Over the course of 48 months, your total amount borrowed will be £13550.4. Out of this £13550.4, the total interest paid will be £2545.40.

Example 3:

You want to buy a new Ford Kuga at £19,200. At the end of 48 months, you are being offered a GMFV of £9313 on this car. There is a deposit of £1000, and an administration fee of £185. You may want to buy this car in exchange of an old PCP deal, which is resulting in a part exchange value of £2500. At an interest rate of 15%, the monthly installment for 48 months will be £182.90 each month. Your total amount borrowed is £8779.20 (£187.02x48). In this case, the total interest paid will be £2256.96, which is the amount over and above your total principal owed.

Why is it important to calculate the Total Interest Paid?

Total interest paid is the amount you are paying entirely above over the car's price. At times, car dealers may offer you very low interest rates. However, what matters to you is the total interest paid and you should look for a deal that offers the lowest total interest paid. As in the example of Ford Kuga, at times the total amount borrowed may seem low in relation to the car price because of the other contributing factors. However, one should not lose sight of the total interest paid. Irrespective of the total payment, this amount is extra and should be kept to a minimum.

We have given you just a few examples of how to calculate the total Interest paid on car loans. You can use our free PCP Car Loan calculator to make your own calculations.

PCP Further Reading

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