If you’re looking to get a car on finance, you will no doubt have to pay interest on top of your loan. It can be hard to know what interest rate you are offered and also how your interest rate is calculated. Many car finance advice guides encourage you to shop around and find the lowest car finance interest rate possible, but you may not be sure why this matters so much. The guide below has been designed to help you get a lower interest rate offered and also understand how they affect your car finance deal.
How does interest work for car finance?
When you shop around for the best car finance deal, you will usually come across both interest rate and APR. Both APR and interest rate are very important when it comes to finance a choosing the wrong one can cost you money. They are often confused but we like to think of the APR as the true cost of borrowing. This is because the interest rate is how much interest you pay but the Annual Percentage Rate (APR) is the interest rate plus any other additional fees and charges you need to pay. This gives a more accurate example of how much your car finance is going to cost.
Why is a lower interest rate better?
Your interest rate is determined by a number of factors, from your current credit score to the type of finance agreement you choose, interest rates can vary massively between each individual car finance applicant. Your interest rate reflects the cost of borrowing and a higher interest rate simple means you pay more back to the lender. A low APR car finance deal means that you pay the lowest amount of interest possible and helps save you money in the long run. It can be worth shopping around or comparing car finance quotes to see what kind of APR you may be offered by a lender before you commit to getting a car on finance.
Do you have to pay interest on a car loan?
Most car finance deals do require you to pay interest on top of the value of your loan. However, it can be possible to get a 0% Apr deal if you wish. However, 0% APR is only really beneficial on brand new cars. When a dealer has a 0% interest rate, they don’t make any additional money off the car, but new cars tend to have a much higher purchase price than used cars, so they make their money back here. You should be wary of dealers offering 0% interest on used cars and is recommended that you read the fine print carefully. Some dealers could hike up the prices of a used car to help cover their losses when they don’t set an interest rate. If you’re looking to get a used car on finance, you should expect to pay an APR and look for the lowest deal possible to help save you money.
Ways to lower your interest rate offered for car finance:
There are a number of factors which can influence the interest rate you are offered. However, there are a number of ways in which you could help to lower your interest rate.
1. Improve your credit score
Usually, the best car finance rates are reserved for people with better credit scores. This is because they tend to have a good history of making payments on time and in full. This reduces the risk to the lender as they are more likely to get their finance back on time. If your credit score is a little on the low side, you could consider improving it in the run up to your finance application to help get you a better deal.
2. Get an idea of what you could borrow
The size of the loan you take out can also affect your interest rate. Before you start applying, you can use a free online car finance calculator which enables you to see how much you could borrow based on your credit score and monthly budget, This then gives you an idea of the loan amount and also how much you’re probably going to pay in interest each month.
3. Use a car finance broker
When you choose to finance your car at a dealer, they may only have a limited number of lenders available. Car finance brokers on the other hand have access to multiple lenders at once. A car finance broker works on your behalf to match you with the most suitable finance lenders from some of the most trusted lenders on the market. Most brokers are free to sue too but it’s worth checking if they charge any fees for using the service first.
4. Choose a shorter loan term
For many car finance applicants, choosing the longest term possible can seem the most cost-effective way to get a car. When you increase the loan term, you are spreading the payments out and lower the monthly amount. However, the longer you pay off your loan over, the longer it takes for the lender to get their money back which can increase the amount of interest you pay and also increase the interest rate offered.
Thank you for reading.
