ad collaborative post // When it comes to getting a car on finance, your APR and interest rate are really important. It can be easy to get bogged down with car finance jargon and trying to understand car finance APR. However, it doesn’t have to be stressful! The guide below has been designed to help you get the lowest APR possible for your circumstances and understand how interest rates are calculated for car finance.
Why is low APR important?
Getting a car finance deal with low APR is really important as it can help you save money on your finance payments. Your car finance APR is the rate of borrowing plus any additional fees you will need to pay and is expressed as a percentage. APR is completely unique to each individual who applies for car finance and is calculated on a number of factors.
Shopping around for low interest rate car finance deals can help you to find the best finance package for your circumstances without having to pay more than you need to. A higher interest rate means you pay more in APR each year and can make the cost of borrowing much more expensive than it needs to be.
Interest rate vs APR – what’s the difference?
When it comes to getting a car on finance, you will come across both interest rate and APR and many people don’t know the difference. Your interest rate reflects the cost of borrowing and the likelihood of you paying your loan back on time and in full.
The APR however is the cost of borrowing plus any other fees you need to pay. When comparing low-rate car finance, it’s best to look at the APR as this is a more accurate reflection of how much you will be paying each year to get a car.
Factors that affect APR rates:
1. Credit score
Your credit score can reflect the rate of borrowing as it indicates how good you are with your money. A bad credit score usually means you’ve missed payment in the past, have a default on your credit file, have no credit history or have high levels of debt.
All of which can lead to lenders setting a higher interest rate as you are more of a risk to lend to. This is because based on your past behaviour, you’re more likely to default on loans or finance again.
2. Size of loan
Borrowing more money from a lender can increase the interest rate you are offered. The amount you lend is based on the price of the car you want to finance so if you’re struggling to make ends meet already, you may want to consider a cheaper, more affordable car to help keep costs and APRs as low as possible.
3. Length of loan term
Not only does the size of your loan affect interest rates but also how long you want to borrow money over. A longer loan term can be attractive as it reduces your monthly payments, but it can increase your APR as you are taking longer to pay your loan back.
4. Type of finance
There are different types of car finance agreements to choose from and some can benefit from lower APR’s than others but may not be suited for your circumstances. For example, personal loans from banks and building societies usually
have lower interest rates but can be better suited to people with better credit scores. With finance agreement such as PCP car deals, you could benefit from a low rate as the loan amount is usually smaller. This is due to the large balloon payment at the end of the deal which swallows up most of the cost to pay.
How to get a lower interest rate for car finance:
There are a number of factors which can affect the interest rate and APR offered listed above. It’s worth remembering that car finance is never guaranteed, and your personal circumstances may stop you from getting a 0% car finance deal but there are ways in which you can help get the lowest interest possible for your situation.
Increase your credit score
Having a better credit score can help to lower your APR offered as you are seen as less of a risk to lend to. Having a good history of meeting payments on time and in full can show evidence that you are good at meeting payment deadlines and also increase your credit score at the same time. If you have high levels of debt, you could consider reducing this before you get a car on finance to help make your loan more affordable and better your score.
Have a deposit to put down
Before you apply for car finance, you should consider what deposit you have available. Some car finance agreements require a deposit at the start of the agreement and putting more money down can be beneficial to you. Having a larger deposit for hire purchase car finance reduces the loan amount and can make your monthly payments and interest rate lower.
Choose a shorter term
Most car finance agreements can be spread over 3-5 years and some even allow you to pay over 7 years! However, a longer loan term means you pay more in interest overall which makes your loan more expensive than it needs to be. You should try to choose the lowest loan term possible but with a monthly payment that you know you can afford to meet each month on time.
If you’re offered a car finance approval, it’s worth shopping around to see if you could get a better deal elsewhere. If you’re financing your car through a dealer, you will be limited to the lenders they have on their panel, and it may not be the best choice for you. However, you could also consider sorting your car finance online through a broker. A car finance broker works on your behalf to compare the lowest APR from a wide range of trusted lenders.