How are car finance interest rates calculated?

What is a car finance interest rate?

Your car finance interest rate will determine how much more you will pay. Lenders use interest rates to make money from your deal and reflect the cost of borrowing money. A low-interest rate means you will pay back less overall and can help you save money in the long run. Your car finance interest rate is added to the price of your vehicle (minus a deposit if you have one) and then divided into monthly payments.

What’s the difference between APR and interest rate?

When applying for car finance, you will come across the terms APR and interest rate, but it can be hard for many to distinguish the two. Interest rate is the cost of borrowing, and your APR or Annual Percentage Rate is the amount you will pay each year with any additional fees included in the cost. The APR is usually a more accurate projection of the total cost of borrowing and is normally higher than the interest rate offered.

What is a good interest rate on car finance agreements?

If you’re looking to get a car finance agreement with the lowest interest rate possible, it can depend on a variety of factors. The rate of borrowing will be different for each individual applicant so it’s hard to pinpoint a ‘good’ interest rate. At UK Car Finance, we can offer car finance from as low as 12.9% which is one of the most competitive car finance interest rates on the market. Choosing this low rate will mean you pay less than those who were offered a higher interest rate.

Which factors affect interest rates on car finance?

There are a number of factors which can affect your car finance interest rate. These can include, your credit score, your loan term, the amount you borrow, your deposit contribution and the lender you choose. It can be confusing to know how to get the cheapest car finance interest rates possible but there are a few things you can do before you start applying. Let’s take a look at how to lower your interest rate offered. 

Improve your credit score

Applying for car finance with good credit can mean you may be offered a lower rate than those with bad credit. This is because you are seen as less of a risk to the lender. People who have missed payments in the past are more likely to default on their car loans. However, having a good history of meeting repayment deadlines and a low level of existing debt can help to improve your credit score and acceptance rates. You should try to increase your credit score before you start applying for car finance if possible. You can do this by reducing how much debt you have, meeting repayments on time and in full, not taking out any new credit and keeping your credit usage low. 

Reduce your loan term

Car finance agreements can be spread over 1-5 years and choosing the right loan term can be key to saving money. If you choose a longer car finance term, your rate of interest won’t usually change but you will pay interest for longer which means you will pay more back overall. Choosing a longer term can help to reduce your monthly payment but it may not be the most cost-effective way to borrow money. When you apply for car finance, you should try to opt for the most affordable monthly payments but with the lowest loan term possible. 

Increase your deposit

There are many options for no deposit car finance but having a deposit can work in your favour. When you put down money to secure your car finance deal, you are lowering the amount you need to borrow from the lender. This can help to lower your interest rate as you don’t need to take out a bigger loan. Having a deposit can also help to reduce your monthly payments and shows lenders that you are good at managing your money.

Shop around

You probably won’t get the most completive car finance interest rate if you take the first deal you are offered. Getting the cheapest interest rate for car finance can take a little bit of time and shop around. However, it’s worth remembering that making multiple applications for car finance in a short space of time can harm your credit score. When you apply with us, you only need to apply once and we match you with the most suitable deal from a wide range of trusted UK lenders!