How to Calculate Hire Purchase Interest on Car Finance

Do you want to know how to calculate Hire Purchase interest so you can be ready for your monthly repayments? 🤔 Here’s a guide to help have an idea of the estimated cost of financing a car with Hire Purchase so you can find one that’s most suitable for your budget. 

Why Do I Need to Pay Interest in Car Finance?

Before we explore how to calculate interest rate on hire purchase, lets look a bit more about why we need to do this.

With financing a car with Hire Purchase, you get to buy a car without having to pay the full price. A deposit at the start of the agreement is a requirement for most car finance deals. Once that’s paid, you can drive the car immediately. The next payments would be the monthly instalments for the whole duration of your contract. 

Basically, the car finance company is the one that made the purchase so you can start using the vehicle. You would then pay them back through a series of affordable payments. So, the interest is the cost of borrowing money from a car finance company. If you pay for a car in full and with cash, you won’t have to pay interest of course since you’re not borrowing money from a lender. Whilst you get to save money, you’d have to spend a big chunk of cash for your car purchase.  

Understanding Representative APR

When you’re looking for the best Hire Purchase car finance deals, you’ll most likely see ads from different lenders and the annual percentage rates that they offer. However, these APRs are what’s called representative APRs and the figure advertised by the car finance company might not be the one that they’ll apply to your Hire Purchase agreement. The representative APR is the rate that lenders offer to at least 51% of their customers. Whether it will be offered to you depends a lot on your credit report, credit score, financial situation, and other factors. 

How is My HP Interest Calculated?

For the common types of car finance products like HP and PCP, there are several factors that matter when calculating the interest rates:

  • Total number of monthly repayments
  • Length of your contract
  • The amount of your deposit
  • Annual mileage 
  • How much the car is worth at the end of the contract
  • The car’s purchase price
  • And the borrower’s credit score

The major difference in how the interest rates are calculated depends on the residual value of the vehicle. For example, for HP and PCP, you would have to pay interest based on the full value of the vehicle, so this includes the residual value. It’s crucial in knowing how much you’d have to pay for the balloon payment in PCP car finance deals

What’s a Good Car Finance Rate?

Most Hire Purchase car finance interest rates range from 4% to 9% and these figures are manageable for most people looking to finance a car. Interest rates are calculated as a percentage of the loan’s value so if you can find lenders offering lower interest rates, the better it would be for you. A low interest rate means more affordable monthly repayments. Of course, bear in mind that your credit history and credit score are important factors that lenders assess before offering you a low car finance rate. 

What is a 0% Interest for Car Finance?

You may have seen ads from car dealerships and finance companies offering 0% interest on their deals. In theory, this kind of deal means you won’t have to pay extra on top of the money you loaned for your car purchase. This is awesome, right? But you have to remember that ads like this are used to attract customers and there’s most likely a catch to a deal that’s this good. 

Lenders need to make a profit from their car finance deals for their business to flourish so if they were to offer zero-interest car financing, they’d soon be out of business. So, even if they don’t apply interest on your Hire Purchase deal, they’re sure to increase the cost somewhere else. Before signing a no-interest car finance agreement, see to it that check what you’ll be paying for in the course of your HP contract. 

Why is My Credit Score Important?

We’ve mentioned previously that lenders have to assess your credit history, score, and financial situation first before they can offer the interest rate they’ll apply on your loan. Your credit score is vital because it’s a figure that represents your creditworthiness. If you’ve taken good care of your finances and paid your loans and debts in full and on time, then you probably have a high credit score. However, if the opposite is true and you’ve missed payments or defaulted on loans, then your credit score might be poor. 

The lower your score is, the more likely the lenders will perceive you as a high-risk borrower. They might not approve your car finance application or if they do, they will most likely offer higher interest rates. For really low scores, interest rates could go as high as 50%. Before diving in and taking the offer, consider improving your credit score first so you’ll have more chances of getting a better car finance rate. 

Using Car Finance Calculators

The easiest and fastest way how to calculate interest rate on Hire Purchase is by using a car finance calculator. Many car finance companies have one on their websites and you can simply adjust the factors like your deposit amount and repayment term to know the estimated cost of financing a car. 

With these calculators, the representative APRs are usually applied so the estimates might differ from the actual interest applied once the lender has fully evaluated your car finance application. Curious to know how it works? Try the Carmoola car finance calculator! 👍