Total Interest

Meaning and Definition

Total interest refers to the cumulative amount of interest that a borrower pays over the entire duration of a loan or car finance agreement. It represents the sum of all the interest charges accrued over the term of the loan and is in addition to the principal amount borrowed.

Why it is important to know

Understanding the total interest is important for borrowers as it helps them assess the overall cost of the car finance agreement. It allows borrowers to compare different loan offers and evaluate the affordability of the finance option. By considering the total interest, borrowers can make informed decisions and choose a car finance agreement that best suits their financial situation and long-term affordability goals.

Example in car finance

Suppose a borrower takes out a car finance loan with a total cost of £20,000 and an interest rate of 5% per annum. The loan has a term length of five years. To calculate the total interest, you would multiply the principal amount (£20,000) by the interest rate (5%) and the term length (5 years). In this case, the total interest would be £5,000 (£20,000 x 0.05 x 5). Therefore, the borrower would need to repay a total of £25,000 (£20,000 + £5,000) over the course of the loan, inclusive of the principal amount and the total interest.