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A Comparison of Car Finance Interest Rates

Finding the best car finance deal that suits your needs and financial situation means giving yourself time for research and doing your own car finance interest rate comparisons. 🔎 Thankfully, you don’t have to make calculations yourself because there are many car finance comparison websites where you can see different deals and offers at a glance. But apart from this, it would also help you to know what to look for when finding competitive car finance rates. 👍

Car Finance: How Does It Work?

When you get car finance to buy a car, you won’t be paying the full price of the vehicle with cash. Instead, the lender will be the one to do that and then you’ll pay them back through monthly instalments. Since the cost of buying a car is spread over a certain period, the amount you pay every month will make it easier to set a budget for your finances. 

So, how long do you need to pay instalments for the car? Car finance agreements can range from 12 months to five years, depending on the type of car finance you chose. Some can even be a long as 7 years. Hire Purchase and Personal Loans are a bit similar because you’d make repayments every month until you pay off your loan. 

If you want to complete the repayment faster, and you have enough money to afford a higher repayment amount, then you can choose a shorter contract term. You can also select a longer repayment period if you want more affordable monthly payments. Once you’re done with the payments, the car is yours to own. 

With Personal Contract Purchase agreements, expect it to be a bit more complex. It’s because the monthly payments you’ll make won’t actually cover the full price of the car. Instead, what you’re paying for is the predicted depreciation of the car throughout your PCP car finance contract term. The typical PCP agreement is two to three years, with the car still having enough equity left that you can use towards the deposit of a new car. If you wish to own the car at the end of the term, you then have to make an additional "balloon" payment. But you can also just hand back the keys.

What’s a Competitive Car Finance Interest Rate?

If you’re asking, “what’s the average car finance interest rate?” in order to compare car finance interest rates, the answer to this depends a great deal on your credit score. For example, if you have an excellent credit score, you can expect to get a low interest rate for your car finance. The opposite goes if you have a poor score due to previous loan defaults or arrears or if you have a county court judgment in your credit report. It’s because lenders would see you as a high-risk borrower. 

But to give you an idea of the average interest rate for car finance, here’s a quick summary of the credit score range and corresponding average rates you might be offered if you’re getting a brand new car.  

  • 780 to 850 - 2.40%
  • 661 to 780 - 3.56%
  • 601 to 660 - 6.70%
  • 501 to 600 - 10.87%
  • 300 to 500 - 14.76%

Always shop around to compare car finance rates - and the best way of doing this is look at the APR or the total amount repayable. Some lenders will add on extra costs and fees, but the APR will reflect those too.

Most car finance deals have a fixed interest rate which means your repayments will stay the same during the term of the contract. Variable interest rate loans are also available but your instalments can go up or down, following the base rate set by the Bank of England. 

Factors that Influence Car Finance Interest Rates

Credit Score and History 

As mentioned previously, your credit score plays a huge role in determining the interest rate that the lender will apply to your car finance agreement. If you have a high credit score, you’ll pay less interest. The average borrower actually has a score of 500 and will likely pay 12.42 percentage points more compared to another borrower who has a 780 credit score. 

Brand New or Secondhand Car

Interest rates for secondhand car finance are actually higher than brand new vehicles. For example, the average used car interest rate for a borrower with a credit score of 780 to 850 is 3.71%. If the borrower gets a brand new car, the interest applied would only be 2.40% on average. 

You might be wondering why this is so. The short explanation is that higher interest rates on used cars help to protect the lender if the car’s value drops. Also, since most used cars are not under warranty anymore, repair and maintenance costs are also higher.

Car Finance Contract Term

Longer car finance contract terms mean more affordable monthly repayments but do note that you’ll be paying more interest in the long run. Also, a long contract term is seen as high risk so a bigger interest rate is applied. 

To save money on your car finance repayments, consider getting a shorter term agreement. Even if the monthly repayments are higher, you’ll be done with the payments much faster and you’ll get a better car finance interest rate. 

Downpayment

The amount you pay for the deposit or downpayment can influence the loan to value ratio of the car. The bigger the deposit, the lower your monthly repayments. You’ll also be borrowing less money, making it possible for you to can get a lower interest rate when financing a car. 

Car’s Make and Model

Of course, other than all these factors, the make and model of the car you want to get is also a factor that lenders will consider when calculating the interest rate. Some cars depreciate slower and have better resale values compared to others. 

Takeaway

When comparing car finance interest rates, you need  the variable factors to be the same. For example, get quotes from different lenders for the same car, the same amount for the deposit, and the contract term. This will help you to compare car finance rates from different car finance companies accurately - and remember to look at the APR too. 

You can visit the websites of car finance companies and make use of their car finance calculators so you can get estimates. For a quick summary of different car finance deals, you can simply do an online search for “car finance comparison websites.” You’ll get tons of results instantly. Take your time and do your research to get the best car finance deal for you. 👍

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