Car Finance

5 Top Car Finance Tips For Better Interest Rates

Car finance can be a great way for drivers to spread the cost of owning their next car. It is increasingly becoming a popular option for many as the cost of both new and used cars are some of the highest, they have been for a number of years. Whilst car finance can be a cost-effective way to get a car, it may not be so friendly to your pocket when interest rates are at their highest in the UK. The guide below looks at how you can make your finance deal more affordable and looks at the top 5 factors that affect the interest rate you could be offered.

Why is interest rate important to car finance?

Interest rates are used on loans or finance and reflects the cost of borrowing. A lower interest rate means you don’t pay as much back to the lender but choosing higher APR can make finance more expensive than it needs to be. The interest rates are set by the Bank of England and can increase or decrease at any time to be in line with how expensive it is to borrow money. Lenders make their money by setting interest rates to customers taking out any sort of loans, credit, or finance. Whilst there are many cars which can benefit from 0 interest to pay, they tend to only be offered on brand new cars which usually have higher monthly payments to cover the cost of the car anyway.

How to lower your interest rate offered:

The interest rate you are offered can be determined by a number of factors, not only can the base rate in the UK affect your interest but your personal circumstances, affordability, credit score and deposit contribution can all also have an impact on the APR you may be offered too. The top 5 tips below are recommendations, and it can be worth remembering that getting a car finance approval is subject to status and you will need to meet the lenders criteria first.

1. Choose a shorter term.

Car finance offers the flexibility to choose a payment term that suits you and your monthly budget. It can be tempting to choose the longest loan term possible, as it can reduce your monthly payment amount. You can use a free car payment calculator to see how different terms affects your loan and you may also notice that a longer term increases how much interest you pay. Lenders may set a higher interest rate for a longer loan term such as 5 years as you will be taking longer to get the money back to the lender. When calculating your car finance, you should choose the shortest term possible for your monthly budget to help get a lower interest rate offered.

2. Put down a larger deposit.

Your interest rate considers how much you are borrowing from a lender. A larger loan amount can sometimes increase the interest rate as the lender is taking a bigger risk. If you want to get the car you want but lower the loan amount, you could consider putting more money down at the start of the loan as a down payment. Deposits are beneficial for finance agreements such as hire purchase or PCP deals as it means you are borrowing less money.

3. Increase your credit score.

From a lenders point of view, car finance is all about risk. It’s the risk they take lending you money and the likelihood of getting their money back on time and in full. Lenders use a credit check to assess how likely you are to stick to the rules of a finance agreement based on your previous financial behaviour. A lower credit score usually indicates you’ve had problems with payments in the past and this increases the risk to the lender and in turn could mean they set a higher interest rate. You could consider increasing your credit score in the run up to a finance application to help reduce your interest rate offered.

4. Use a broker to compare rates.

The emergence of credit brokers has made it easier for applicants to compare the best finance rates whilst also protecting their credit score. Applying with multiple car finance lenders to get the best rate can have a negative impact on your credit. Instead, you can apply once with a finance broker, and they do all the leg works for you. A broker for cars UK is able to compare multiple finance lenders on their panel at once and works to get the lowest interest rate available from some of the most trusted UK lenders. You then have the freedom to take your finance deal to any participating UK dealer and get a car within your budget.

5. Refinance your current loan.

If you already have a car on finance and your payments are costing you too much, you could consider refinancing your current loan. Refinancing is when you replace your agreement with a new credit agreement and usually swap it for lower monthly payments or better interest terms. It can be the most cost effective to wait until you are at least halfway through your finance agreement before you try to refinance though.