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How does APR affect car finance rates?

How does APR affect car finance rates? 1

If you’re looking to get a car in finance, you may wonder how much it will cost to borrow money. It can be impossible to say without knowing more about your situation, and each person who applies for car finance will get their deal. Your car finance payments can be affected by several factors, such as loan amount, term length, and the Annual Percentage Rate offered. Your APR is really important when it comes to getting a UK car finance deal and choosing the wrong APR can mean you are making car finance payments more expensive than they need to be. The guide below has been designed to help you explore why APR is important when getting a car and how to lower your APR offered.

car finance

What is APR?

Your car finance APR or annual percentage rate reflects the cost of borrowing. It’s also often confused with an interest rate, so it’s worth knowing the difference. Your interest rate is the percentage of interest you are charged to borrow money from a lender to fund your car purchase. On the other hand, your APR is the interest rate plus any other additional fees you need to pay. Your APR can reflect the true cost of borrowing as it gives you a clearer idea of how much you will pay each year to borrow money.

Why is APR important when borrowing money?

Several factors can affect your car finance APR offered, which completely depends on your circumstances. When getting a good car finance deal, you may miss out if you opt for a higher interest rate. The higher the interest rate, the more you will repay to borrow money. When searching for the best car finance deal, choosing the lowest APR possible is best to help get you the cheapest deal. Lenders may provide you with a soft search credit check first or check your eligibility to help get an idea of what type of borrower you’ve been in the past before they commit to providing you with finance approval.

Factors that affect your car finance APR:

Before making finance applications, you could consider getting a low APR car finance deal by following the factors below.

Increase your credit score.

Your credit score is one of the main factors in determining your car finance APR. Your credit score reflects what type of borrower you have been in the past, and many bad credit lenders use your interest rate to help secure the deal. The likelihood of you paying your loan back on time if you’ve missed payments in the past is slim, so lenders may set a higher interest rate to reflect the level of risk. A better credit score can give you access to higher credit limits, easier acceptance rates, and lower interest rates.

Consider a larger deposit.

Many car finance agreements don’t need a down payment at the start of the loan, but having a deposit for hire purchase can work in your favor. Putting more down at the beginning of your loan decreases how much you need to borrow from the lender. A smaller loan can benefit from a higher APR than a brand-new car with 0%, but the purchase price will always be higher buy a new vehicle which bumps the loan amount. This means choosing a smaller loan on a cheaper car with an affordable interest rate could work out cheaper.

Choose a shorter loan term.

No matter which form of car finance you choose, you can usually repay your loan over 3-5 years. It can be tempting to pay your loan over a longer term as this helps to reduce your monthly payments as you take longer to pay back. However, the longer you choose to finance your car, the longer you pay interest, which can influence the interest rate at the deal’s start. It would be best to choose the shortest car finance term using a car loan APR calculator and working out affordable monthly payments you know you can meet each month.

Choose the right loan amount.

As mentioned above, opting for a low or 0% interest rate can be attractive, but it may not benefit your circumstances most. A 0% interest rate on a higher car loan may not be the cheapest way to finance a car. It’s really important that when you sign up for a car finance agreement, you can meet each payment on time and in full.

Type of car finance agreement

In the UK, three types of car finance agreements tend to be the most popular. You could benefit from better rates depending on your car finance choice. Personal loans are the most cost-effective, but you may struggle to access the best rates with a low credit score. PCP car deals can be offered with common interest as you don’t take as long to repay the loan, and the loan amount is smaller due to its structure. Unlike hp, you only cover the cost of the deprecation of the car and its total value. It’s worth exploring different car finance deals to see which suits you best.