My Car Finance Is 25% APR, Can I Get a Better Deal?
Annual Percentage Rate (APR) may sound like just another piece of difficult car financing jargon, but it's a critical component to grasp if you want to take up a good value car finance contract. This is because it indicates what you get when you add the interest rate at which the car is borrowed and any additional expenses for borrowing, which might include things like financing fees.
What you need to always keep in mind is one essential point: the greater the APR, the more expensive your borrowing will be, but it includes additional interest rates and other charges that might be applied. But what if you've got a car finance deal with an interest rate of 25% APR, is that a good deal? Could you get a better one? Keep reading to find out what you can do to make sure you’re getting the lowest interest rate possible.
What Is a Standard APR On Car Finance?
APR stands for Annual Percentage Rate and, in principle, should indicate the real cost of financing. This amount includes the interest charged on a loan as well as any other costs, which are not often evident. The greater the APR, the more you'll pay in total. APR is calculated by lenders using a common approach, making it the easiest way to compare rates.
So, what constitutes a decent APR rate? An APR of 6% - 12% might be predicted if the applicant has a credit score ranging from excellent to decent. However, if the applicant's credit score is ordinary or bad, interest rates can swiftly rise and lenders become scarce.
If you've got a low credit score, you might have to go for more specialised lenders, although fees can increase by more than 20% owing to the risk the lenders are incurring.
What makes matters even more difficult is that there are several lenders in the vehicle loan market, and it can rapidly become difficult to distinguish which may give truly fantastic bargains and which aren't as good as they claim to be.
How You Can Get The Lowest APR Car Finance UK
The cost of finance you receive is heavily influenced by your credit score, which finance providers use to assess the risk of giving you funds; the lower the risk they think you pose, the lower the APR you'll most likely be charged.
Your risk level is determined by variables such as your credit repayment history and the security of your position, such as whether you have stable employment, own a home, or are on the electoral roll.
Those with the greatest credit scores will most likely be offered the lowest APR vehicle loan, whilst those with low credit scores will be given higher rates, and 0% APR options - widely known as interest-free credit - will probably not be available.
However, keep in mind that 0% APR rates aren't necessarily the greatest value choice, as options with a high APR number and a big deposit payment may be less expensive. Thoroughly shopping around will reveal which precise choice provides the best value.
In certain situations, upping the size of your deposit on your auto financing can also lower the APR offered since you'll be borrowing less money, lowering your risk to the finance company and implying that if you missed any payments, reselling the car would be more likely to satisfy the outstanding debt.
Low APR Car Finance
There are no interest and no additional costs with 0% APR finance because you just return the amount borrowed, therefore there is no penalty in taking out credit compared to buying outright.
In truth though, many 0% APR agreements aren't as cheap as they appear to be. Many deals, for example, cannot be combined with other reductions, such as cash price savings or deposit contribution rewards. In this case, the car is essentially more expensive than in other agreements, therefore you could be saving much less than you believe.
Was I Mis Sold Car Finance?
The Financial Conduct Authority discovered proof of mis-selling across all sorts of auto loan alternatives during an inquiry. Customers were unaware that certain vehicle dealerships earned commission from lenders, which was frequently tied to the interest rate they were charged. Given that vehicle dealers may select the interest rate, this established an opportunity for them to sell more costly credit, so working against the best interests of their consumers. They also put pressure on customers to buy other products like GAP insurance, which is often much cheaper elsewhere and as a result they are no longer permitted to sell that at the time of transaction.
Car loan arrangements in the United Kingdom almost all have a fixed interest rate for the entire duration of the contract. So, if your APR (annual percentage rate) was 5.9% when you signed up, it will continue at that level for the duration of the deal.
That also means that your repayments will remain the same for the duration of the loan, regardless of whether the Bank of England raises or lowers its interest rate.
When being sold car finance, it’s important to ask yourself:
- Did you completely comprehend the financing offer made to you?
- Were you informed of any alternative financing options?
- Did the car dealer or finance broker inform you how much commission they received?
If you’re unsure of the answer to these questions, it’s rather likely that you were mis-sold car finance. The lender has a duty to tell you about the terms of their vehicle loan contract, as well as what they can and cannot do so that you are paying for a plan that is suitable for you and what you were looking for. If they have not done so, you may be entitled to compensation.
Whether or not you have lost money, if the car isn't suited for you as a consequence of mis-selling, you should file a complaint to prevent the lender from doing this in the future.
Need more guidance surrounding your car finance plans? Maybe you have a very high interest rate on your car loan and want to look for a cheaper deal. We can help! Check out the Carmoola blog which has plenty of useful car finance advice, information on refinancing a loan, and lots of other resources. 😊🚙