If you’ve never taken out car finance before or any type of loan, you may not know how your interest rate is calculated or why you have been offered that interest rate. Your interest rate is added to your monthly payments so it’s really important that you know how to get the lowest rate available.
Car finance interest rate – what is it?
An interest rate is a percentage charged on the total amount you borrow from a car finance lender and is also a percentage of the amount loaned. Finance lenders make their money by charging interest, if not, they would give out free money to get the same amount back. The interest rate on a loan is usually calculated annually and this is known as the Annual Percentage Rate (APR).
What is the difference between interest rate and APR?
Many people get your interest rate and Annual Percentage Rate confused. In many cases, the APR tends to be higher because the annual amount borrowed usually includes additional fees which are charged by the lender. The APR offered is usually a better gauge of how much the loan will cost than the interest rate on its own. However, if you are shopping around, you should compare both offered by different lenders. As a car finance broker, we do this for you and get you the best deal possible!
How is the interest rate added to your car finance deal?
The rate offered will be added to the price of the car (minus any deposit paid) to get the total amount you will pay and is then divided into monthly payments. You will then make monthly payments till the end of your finance term with fixed interest each month. Car finance loans are usually spread over 1-5 years and having a lower rate offered is better for you in the long run.
What is a representative APR?
As mentioned above, your annual percentage rate is the total cost of borrowing for a year. But what is a representative APR? Many adverts and finance websites promote a representative APR. As you’ll see at the top of our page, our Representative APR is 17.55%. This means that over 51% of Refused Car Finance customers that had their loan arranged were offered an APR of 17.55% or lower. However, this is not the rate that all customers get offered and many customers get offered a lower APR. The personal APR is the APR that is being offered specifically to you.
How is interest rate calculated on a car loan?
There are a couple of factors that affect the rate you will be offered.
The amount the loan is for
Lower rates tend to be offered for bigger and longer loans. For car finance, opting for a longer-term can lower your rate but it increases the amount you will pay overall, and it can mean you end up paying more than if you took a shorter loan. You should also consider how long you want to keep the car for, if you like to change your car every couple of years then a 3–4 year finance deal isn’t always the best choice.
Your current credit score
Typically, having a better credit score means that you are seen as less of a risk to a lender, so you are usually offered a lower rate. Having bad credit means you can be offered a higher interest rate than those with good credit. However, we work with a range of finance lenders who offer fair and affordable interest rates for people applying for car finance with bad credit.
How can you lower the interest rate offered?
If you want to get the best rate, there are a few ways in which you can help to lower your interest rate.
Improve your credit score
In the run-up to a car finance application, you could consider rebuilding your credit score. Having a better credit score can increase your chances of getting approved, lower your interest rate, and ultimately save you money in the long run.
Lower your loan term
Extending your car finance term can lower your rate but when calculated, having a longer term can actually mean that you pay more interest overall. You should only ever choose a car finance package that you can afford to meet the monthly repayment deadline each month. If you can’t make the repayments, you could have the car taken away from you.
Choose the right lender
Refused Car Finance work on your behalf to get you the best deal possible. We compare a range of lenders and finance deals to get you the most affordable deal with the lowest rate available!
Ready to get started?
Let us get you the best interest rate from a wide range of trusted finance lenders!