How much does buying a car on finance really cost?

Buying a car while looking only at the monthly payment is one of the easiest ways to lose sight of what it will really cost. A payment of 299 euros can seem much more manageable than paying 25,000 or 30,000 euros immediately, but those figures cannot be compared directly: the first represents only a small portion of the cost, whereas the second represents almost the entire price of the asset. When assessing finance, therefore, the question that interests me is not “how much do I pay each month?”, but rather: “how many euros will have left my wealth altogether by the time I finish paying for this car?”. In my view, that is where every comparison should begin.

The price of the car and the cost of buying it are not the same

Imagine a car priced at 28,000 euros. If I paid immediately, setting aside insurance, vehicle tax, maintenance and other running costs for a moment, the purchase cost would be simple: 28,000 euros. With finance, the calculation changes. There may be a deposit, dozens of instalments, interest, processing fees, commissions, insurance policies and perhaps a final balloon payment. The total cost of a car bought on credit can therefore be expressed very simply as:

This is the amount to compare with the price we would have paid for the same car without finance. Consumer credit legislation defines the total cost of credit by taking account of interest and other financing-related costs, including commissions, taxes and, under certain conditions, ancillary services such as some insurance policies.

TAN and TAEG: why looking only at the interest rate can mislead

Quotes normally show at least two percentages: TAN and TAEG. TAN, the nominal annual interest rate, essentially measures the rate used to calculate interest on the financed principal. It matters, but does not necessarily represent everything we will pay. TAEG, the annual percentage rate of charge (APR), seeks instead to express the overall cost of credit as an annual percentage. It includes not only interest but also other relevant financing-related costs. That is why the Bank of Italy identifies TAEG as the measure to use when comparing loans with similar characteristics. Suppose, for example, we see:

Simply saying we are borrowing “at 6.90%” would be incomplete. That 6.90% describes nominal interest, whereas the transaction's effective cost also reflects other charges. Two offers with similar TANs may therefore have very different TAEGs.

A complete example

Consider a car costing 28,000 euros. We pay a deposit of 6,000 euros and finance the remaining 22,000 euros over five years. Purely to construct a mathematical example, assume a TAN of 7.5%. With 60 monthly instalments, the loan payment would be approximately 440.83 euros. By the end, we would have paid:

If we added, for example, 350 euros in initial fees and 3 euros a month in other charges for 60 months, that would add another 530 euros. The total cost would therefore be approximately:

The 28,000-euro car would have cost us almost 33,000 euros, or around 4,980 euros more. That does not automatically mean financing the car is wrong. It simply means the financial service has a price, which must be quantified before deciding.

A low instalment may conceal a balloon payment

In recent years, arrangements offering relatively modest monthly payments while leaving a substantial portion of the car's value until the end of the contract have become very common. Consider another example: a 30,000-euro car, a deposit of 5,000 euros, 36 instalments of 299 euros and a final payment of 15,000 euros. Looking only at the message “299 euros a month”, the car seems particularly accessible. But the calculation is:

And we have not yet added any interest or further costs not already included in those assumed amounts. A balloon payment is not necessarily a bad thing. It can make sense for someone who already knows how to handle it. The problem arises when we mentally treat it as something for our “future self” to deal with. Those 15,000 euros are already a debt today, even if payment will only fall due in three years.

“But they give me a discount if I take the finance”

This is one of the most interesting cases because it can completely change the comparison. A dealer might offer:

At first glance, paying outright would seem absurd: financing the purchase gives us a 2,500-euro discount. But we need to complete the calculation. If interest, commissions and other financing costs totalled 4,500 euros, the actual cost would become:

The 2,500-euro “discount” would then have produced no ultimate saving: we would have spent 2,000 euros more than the 30,000 euros required without finance. The opposite could also occur, however. If the discount were substantial and the financing inexpensive, the financed offer could be economically attractive. That is why I would never use an absolute rule such as “dealer finance is never worthwhile” or “financing is always better because they give discounts”. You need to do the sums.

The document I would request before signing

Before a consumer credit agreement is concluded, the lender or intermediary must provide the SECCI, the Standard European Consumer Credit Information document. It contains essential information such as the loan amount, term, instalments, interest rates, TAEG, costs and the consumer's main rights. The Bank of Italy also emphasises that SECCI must be supplied free of charge before signing, specifically to let the customer examine and compare the offer. If comparing two car finance arrangements, therefore, I would not stop at the advertisement or commercial quote. I would put the two SECCI documents side by side, ensuring the financed amounts and terms were comparable. Comparing finance of 20,000 euros over four years with 24,000 euros over seven years solely by TAEG would make little sense: these are different transactions.

The seven figures I would examine

Before deciding, I would reconstruct at least these elements:

• the car's price without finance
• the required deposit
• the principal actually financed
• the number and amount of instalments
• any final balloon payment
• TAEG
• the total amount ultimately paid

The last figure often immediately puts the transaction into perspective. A payment of 350 euros may seem small. But 350 euros over 84 months means 29,400 euros. Seven years is also a long time in a car's life. We could still be paying off the finance when the vehicle has already lost a significant share of its value and begins needing more expensive maintenance.

There is also opportunity cost

So far, we have reasoned as though there were only two alternatives: spend the money now or pay interest. In reality, there is also opportunity cost: what we give up by choosing a particular option. If I have 30,000 euros and use it all to buy the car, I can no longer use that cash for other needs, emergencies or investments. This is often used as an argument for financing: “I keep my money invested and finance the car.” The reasoning can be valid, but only with a consistent comparison. If financing costs me an effective 8% a year, for example, simply saying “I could earn more by investing that money” is not enough. A future investment return is generally uncertain, whereas the contractual financing cost is much more certain.

Comparing a certain cost of 8% with an expected equity return of 8% as though they were equivalent ignores risk entirely. Conversely, using all available cash to avoid any financing could be equally irrational if it left us without an emergency fund. The right choice therefore depends not only on the rate, but also on our asset position and ability to absorb unexpected expenses.

Repaying the loan early can reduce its cost

Another point to know is that consumer credit can be repaid early, including partially. In that case, the consumer is entitled to a reduction in costs reflecting the shorter contract duration. In certain circumstances, the lender may charge compensation which, according to the Bank of Italy's guide, normally cannot exceed 1% of the sum repaid where more than one year remains to maturity, or 0.5% where the remaining term is one year or less, subject to the statutory exceptions. This can be particularly important for someone taking out finance today who expects greater liquidity in the coming years. It is nevertheless necessary to read the specific contract and quantify the actual benefit of early repayment.

The real mistake is focusing on the largest monthly payment we can afford

To me, this is the most important point. When buying something in instalments, we naturally tend to shift the question from “how much does it cost?” to “can I afford 400 euros a month?”. But these are different questions. I could be perfectly able to pay 500 euros a month while buying a car on unattractive financing terms. Instalment affordability concerns personal cash flow, meaning the ability to meet recurring outgoings. Economic value concerns the overall cost of the transaction. Finance should pass both tests. The Bank of Italy expressly draws attention to assessing income and the ability to sustain instalments over time, including the possibility of unexpected events during the loan period.

So, is buying a car on finance worthwhile?

There is no universal answer. Finance can help spread a substantial outlay over time, preserve some liquidity or access particular commercial terms. But turning a high price into a small monthly payment does not automatically make the purchase cheaper. I would first look at the car's price without finance. Then I would reconstruct the deposit, instalments, balloon payment and all costs. Finally, I would compare the total with the alternative. It is a simple method, but it removes many of the illusions created by monthly payments. When I see “from just 299 euros a month”, therefore, the number I want to know is not 299. It is the figure that appears after everything has been added up.

Note: This article is for information and educational purposes only. It does not constitute financial, credit, tax or legal advice and does not replace assessment of the contractual terms of an individual loan.