What's a Common Car Finance Rate of Interest?

The interest rate is a crucial metric when you borrow money, be it to buy a home, get a credit card or finance your car. 

With interest rates hitting a 15-year high, it probably won't come as a surprise to learn that people are more inquisitive about the interest rates attached to finance.

So, what do you need to know about interest when it comes to finance? For instance, what's a common car finance rate of interest?

We've got the answer plus much more in this guide. 

How Car Finance Interest Rates Work

Car finance interest rates are the cost you pay for borrowing money to purchase a car. 

These rates are expressed as a percentage of the loan amount and can vary based on several factors, such as:

  • The lender's policies
  • Your credit score
  • The loan term
  • The type of vehicle you're purchasing. 

Essentially, the interest rate is what the lender charges for using their money to buy a car, and it's a significant part of your monthly car payments. 

Understanding how these rates are calculated is helpful for planning your finances and can help you in getting your budget right. 

Making the most of tools like a budget calculator can provide a clear picture of how different interest rates will affect your monthly payments and overall loan cost. 

Being aware of how car finance interest rates work means you can make more informed decisions that align with your financial goals while taking ownership of your car finance process.

Factors Affecting Car Finance Interest Rates

While a car finance company may offer a specific interest rate, it doesn't necessarily mean you'll pay it. 

There are several factors at play that impact the interest rates you may be subjected to, including:

Credit Score

Your credit score is one of the most important factors when it comes to interest rates on car finance. 

A higher credit score typically reflects responsible credit management and usually leads to lower interest rates for the borrower. 

At the same time, a lower score may result in higher rates, reflecting a higher perceived risk to the lender.

Loan Term

The length of the loan term may also influence interest rates. 

Longer loan terms tend to have higher interest rates, as they represent a more extended risk for the lender. 

So, while the monthly repayments might seem smaller because you're borrowing the money over an extended period, you could actually end up paying more in the long term due to higher interest rates. 

New cars often have lower interest rates compared to used cars. 

This is because new cars typically have a higher resale value and can reduce the lender's risk if the loan goes into default.

However, used cars tend to be more affordable. 

So even if the interest is higher, you could still end up paying less overall as a result of the second-hand vehicle's lower price point. 

Lenders' Policies

Different lenders have varying policies and may offer varying levels of interest rates. 

Some lenders specialise in loans for specific types of vehicles or borrowers with particular credit profiles, for example.  

Shopping around and understanding different lenders' policies can help you find the best rate.


The amount of money you put down upfront can also influence your interest rate, as a larger deposit reduces the lender's risk and potentially leads to a lower interest rate.

Economic Conditions

Broader economic conditions, such as the state of the economy and national-level interest rates, can also affect car finance interest rates. 

During times of economic downturn, like the ones we're seeing with the cost-of-living crisis and higher inflation, interest rates tend to be higher. 

Currently, the Bank of England, which sets the interest rates for the county, Base Rate is 5.25%, up from 0.1% at the end of 2021. 

Special promotions

Sometimes, manufacturers, dealers or lenders offer special financing promotions with reduced interest rates.

These promotions can lead to lower rates but may come with specific terms and conditions.

Average Car Finance Interest Rates in the UK

The landscape of car finance interest rates is quite diverse.

As of the first quarter of 2023, the overall average car loan interest rate was 6.58% for new cars and 11.17% for used cars.

Again, these figures can fluctuate based on a multitude of factors, such as your credit score.

The type of loan you choose, be it a personal contract purchase (PCP), hire purchase (HP), or a personal loan, can also influence the rate. 

It's also worth thinking about the overall cost of the loan and not just the interest rate. 

APR stands for the annual percentage rate of interest you’l; pay on the loan to buy a car. 

It's typically fixed for the duration of the loan, which can be anywhere between 12 months and seven years. 

Learn more about APR when you purchase a vehicle with finance. 

Tips for Securing the Best Car Finance Rate

Finding the best rate means you can keep your monthly repayments down and ultimately borrow less in the long term. 

Let's take a look at some handy tips for securing the best car finance rate:

  • Check your credit score. Knowing your credit score will give you an idea of what interest rates you can expect.
  • Use a budget calculator. A budget calculator can help you understand what you can afford and guide you in choosing the right loan.
  • Shop around. Don't settle for the first offer unless it's a really good one. Compare different lenders to find the best rate.
  • Consider a shorter loan term. If possible, opt for a shorter loan term to potentially secure a lower interest rate.

Comparing Car Finance Deals: Finding the Right Interest Rate for You

When comparing car finance deals, consider not only the interest rates but also the overall cost of the loan, including fees and charges to take ownership of your car finance

Take the time to understand your needs and use finance platforms like Carmoola, where you can get your budget in just 60 seconds.

Learn More About Car Finance

What Happens if I Buy a Car With Outstanding Finance?

What Does Pre-Approved Car Finance Mean?

What Are the Best Car Finance Deals for New Drivers?


What Is the Average Car Finance Interest Rate?

The current overall average auto loan interest rate is around 6.58% for new cars and 11.17% for used cars.

How Does My Credit Score Affect Car Finance Interest Rates?

Your credit score plays a crucial role in determining your car finance interest rates. A higher score may lead to lower rates, while a lower score may result in higher rates.

Can I Get a Good Interest Rate with Bad Credit?

Yes, it's possible to get a reasonable interest rate with bad credit, but it may require more effort in shopping around and possibly considering a co-signer.

How Can I Secure the Best Interest Rate for My Car Finance?

Securing the best interest rate involves understanding your credit score, using tools like a budget calculator, comparing different lenders, and considering factors like loan terms and type of vehicle.