Understanding car finance interest rates
Regardless of what type of car finance you opt for when buying a car, you will almost always have to pay some form of interest on your purchase.
To help you understand what car finance interest is and how it may affect your purchasing decision, we’re breaking down interest rates for car finance into their simplest form, as well as explaining how interest rates differ from APR.
What is car finance interest?
Interest on car finance is used by lenders to calculate how much you’ll pay in total for your car, on top of its base cost. Car finance interest is essentially the amount you’ll pay the lender to loan the money.
Interest rates are based on numerous factors, such as the price of the car, your credit rating, finance type, and your current financial situation, and dictates how much extra you’ll pay for finance instead of buying the car outright.
How do interest rates for car finance work?
The interest rate on car finance works in exactly the same way as the interest for any other loan, though the type of interest will depend on the type of loan you choose.
In many cases, given the rising price of cars in recent years, many people will opt for some form of car financing; be it PCP finance, HP car finance, or something else entirely.
With these forms of finance, you’ll be given a fixed interest rate that’s precalculated based on the car cost and doesn’t change over time, giving you an accurate estimation of what you owe.
This is also common when taking out a personal loan.
Other factors that will influence your car finance interest include things like the term length, potential deposit you may be able to contribute, as well as your credit score, and current financial situation. And, of course, if you choose to lease your car, the interest rate will be based on other factors entirely.
How is interest on car finance applied?
Interest rates for car finance are calculated by combing the cost of a vehicle with the percentage interest. This total is then divided by the number of months you’ve agreed as your repayment term.
This gives you an accurate assessment of how much you would pay each month with interest on top, making budgeting and repayment simple.
What is the difference between car finance interest and APR?
When looking at car interest, chances are you’ve also come across the term APR. APR stands for Annual Percentage Rate and is a representation of the total amount you could pay for a car.
Confusion can often arise between interest rates on car finance and APR because the two are closely related. However, an interest rate is a specific total you will pay, while car finance APR is merely an overall estimation that includes the interest rate as well as any other additional fees.
What is a good interest rate for car finance?
When it comes to determining a good interest rate on car finance, it’s important to remember that there isn’t simply one interest rate that fits everyone.
As a general rule, though, the lower the interest rate, the better; a low-interest rate means you pay back less overall in the cost of interest, saving you money.
At Zuto, car finance interest rates start from 7.9%, and are based on certain factors like your credit score – but your interest rate could be reduced if you invest a large deposit.
Whether or not a certain interest rate is good for you will also depend on your repayment term. A longer repayment term will make it much easier to budget for a high-interest rate compared to a high-interest rate on a short term loan.
Tips for getting a lower interest rate
So, if you find your potential car finance interests are high, what can you do to decrease them? Fortunately, there are a few steps you can take to lower the typical car finance interest rates offered by lenders.
First, do your research. We’re a finance broker – so when you apply for car finance with us we’ll search the large panel of lenders we work with, who all offer different interest rates depending on your personal circumstances.
You should also look to boost your credit score, whether by repaying outstanding debts, ensuring bills are paid on time, or consolidating any outstanding debts you have into a single debt for easier repayment.
Finally, even if you have your sights set on a specific car, if that car is too expensive, you may have to consider buying a cheaper model. This could mean another model entirely or buying a second-hand model of the car you want.
Of course, there’s a lot more that goes into financing a car than simply understanding interest rates. You need to pick the right car finance option for your needs. Here at Zuto, our experts are on hand and ready to help you start your car financing journey. Simply get in touch today or visit the Zuto blog for more articles like this one.
Mike has worked at Zuto since 2018 and uses his experience within the industry to help customers understand the ins and outs of car finance.