Annual Percentage Rate: Car Finance Jargon Busters

You may have already encountered jargon terms like Annual Percentage Rate or APR when reading about car finance, but maybe you’re not yet entirely sure about what it means exactly. 🤔 When you know the APR of a car finance deal, it becomes easier to compare that to other deals being offered by various lenders. So let’s learn more about the average APR on car finance UK. 👍

Understanding Annual Percentage Rate

The annual percentage rate is important to know if you’re financing a car. With the car finance APR UK, you’ll have an idea of how much it would cost you to borrow a certain amount of money to buy a vehicle through car financing. 

The APR takes into account the loan’s interest as well as other necessary fees, and if the APR is high, then expect to pay more overall. Car finance companies calculate their APRs using a specific standard method, that’s why looking at the different lenders’ APRs is the best way you can compare their deals and find the best one. 

What is Representative APR on Car Finance?

For every car finance quote, there should be an APR figure included. So, whether you’re getting a Personal Contract Purchase or Hire Purchase car finance agreement, you should be able to see their annual percentage rate. 

If you’re getting a car lease agreement however, you won’t see an APR because it’s a different type of car finance deal. With a lease, you don’t have the option to buy the car at the end of your contract, unlike HP or PCP car finance. 

The representative APR on car finance is what lenders use to promote their car finance deals. It will show interested car buyers what the cost of credit would be to the majority of borrowers. This figure is calculated as the rate that the lenders offer to 51% of their customers. 

If you have an excellent credit score, you’ll have the chance to be offered a better rate compared to the representative APR. That’s why it’s crucial to maintain a good credit rating so you’ll be able to save money when getting car finance. 

Getting the Lowest Car Finance APR

The cost of the car finance deal you’ll get highly depends on how good your credit score is. Lenders rely on borrowers’ credit scores to know whether they’re low-risk or high-risk borrowers. 

If you have a good credit rating, then that means you have been responsible when it comes to meeting your previous financial obligations and you’re a low-risk borrower. In this case, you might get a lower APR charge from lenders. 

If you have a poor credit score, you might want to consider improving it first before applying for car finance. For example, you can register on the electoral roll so that lenders can verify your present address, pay off existing debts, and check your credit record for any errors that might have been pulling your credit score down. Doing so will improve your chances of getting a better car finance deal with a lower APR. 

Are 0% APR Deals Good?

Borrowers with high credit scores usually get lower APR deals on car finance. Those with low credit ratings will most likely be offered higher APRs on their car finance deals. But what about 0% APRs? This may sound like a really great offer, however, you still have to be careful about them because they might not be the best option for you. 

You may choose to pay a large deposit even if the APR is higher and that might still be cheaper than a 0% APR deal if you look closely and compare them. These zero per cent APR deals usually miss out on incentives like deposit contributions as well as other discounts. These incentives are normally available on car finance agreements that do charge interest. You might also end up paying higher monthly payment amounts with a 0% APR deal. Always shop around, compare, and do the maths!

What is the APR for New Cars?

For new cars, manufacturers and lenders sometimes offer 0% APR deals or low-interest deals. For example, you might have already been offered a 2.9% deal on car finance. Some borrowers may even be surprised that they’ll get a 1.9% APR deal. With this, you won’t have to pay so much interest when financing a car. 

The catch here is that since you’re getting a brand new car, it typically has a higher price tag compared to its used counterpart. This means you’d still have to pay a higher monthly payment that a cheap vehicle with a higher annual percentage rate since you’re borrowing more money for a brand new car. Brand new cars do depreciate very fast so you might prefer to go for a nearly new or demonstrator car - these can be better buys.

What is the APR for Used Cars?

Since manufacturers can no longer offer finance discounts on used cars, expect that you won’t find any 0% APR deal on second hand vehicles. In the rare chance that you do, it’s possible that the cash price will be artificially higher so that the seller can compensate for the loss of not charging interest. Nonetheless, you can still find low annual percentage rates even that might suit your financial situation. 

When comparing different car finance deals, ensure that you check the APR of several different lenders so that you’ll be able to get a better picture of the possible deals. Simply looking at the interest rate is not a good idea because it doesn’t include all of the charges you need to pay when you take out a car finance agreement, so compare using the APR.


With Hire Purchase and Personal Contract Purchase deals, the APR quotes should be able to include the total amount you have to pay. This allows you to compare different deals from the best UK car finance companies. If you get a PCP agreement, then the quote should also include the optional balloon payment that you have to pay to own the vehicle. 

Remember that your deposit contribution is not usually included in the computation of the total amount payable. If you are offered a deposit contribution, you may subtract the amount from the total amount payable to know the figure you’ll have to pay overall. In case you’re still confused about what annual percentage rates are, feel free to get in touch with us here at Carmoola!