How interest-only car finance works
During the interest-only period you pay just the interest, so the balance does not fall. When that period ends, the loan converts to a normal repayment loan over the remaining term, which is why the later payment is much higher.
Because the balance stays high for longer, total interest is higher than on a repayment loan of the same length.
Worked example
Borrowing £25,000 at 8% over 10 years with 3 interest-only years costs £166.67 a month for the first 3 years. The remaining 7 years then cost £389.66 a month.
Total interest is £13,731.05, compared with £11,398.28 on a repayment loan, so the interest-only period costs an extra £2,332.77.
Who it suits
Interest-only periods are sometimes used when income is temporarily low, or as a bridge before selling or refinancing. They are risky if the higher payment later is unaffordable.
Ask the lender what happens at the end of the interest-only period, and whether the loan converts automatically or needs a new agreement.
Inputs for the interest only car loan calculator
Amount borrowed
The amount financed after any deposit.
Interest rate
The yearly rate on the loan.
Term
The full term of the loan, in years.
Interest-only period
How many years at the start you pay interest only.
CALCULATOR QUESTIONS
Interest only car loan calculator questions
Does an interest-only car loan reduce the balance?
Not during the interest-only period. The balance stays the same until repayments start.
How much more interest does it cost?
In the example, £2,332.77 more than a repayment loan of the same term.
What happens at the end of the interest-only period?
The loan switches to full repayments over the remaining term, so the payment rises sharply.
Can I overpay during the interest-only period?
Usually yes, and it is worth doing because every pound reduces the balance and the later interest.