Do Car Loans Have a Fixed Interest Rate in the UK?

If you're planning to buy a car in the next couple of months, whether it's new or used, you'll probably be using car finance. In the UK, 92.3% of new cars are purchased through car finance, so it’s no surprise that a car loan tickles your fancy too. 

Welcome to the world of car finance. It can be wonderful, but it can also be quite tricky to get your head around. There are so many questions that come to mind when trying to decide on what kind of loan you should go for. The issue we will be focusing on today is fixed rate car finance. In the UK,  do car loans have a fixed interest rate? We’ll also be discussing which is the best between a fixed vs variable interest rate car loan. Let’s dive right in! 

What is a Fixed Interest Rate? 

The term fixed interest rate describes an interest rate which stays the same throughout the duration of your car finance contract. This is different to variable interest rates because it will never change even if the market fluctuates.

You will find that car finance agreements typically have fixed interest rates which are set by your lender on your contract. This is something to pay attention to because different interest rates can have a huge impact on how much your loan will cost you. For example, you'll be able to access a far lower rate than someone with a worse credit history than you. Don’t worry, we’ll get into that a bit later.

Having a fixed interest rate loan can offer lots of benefits because you'll know exactly how much you'll be paying each month and you won't have to worry about that amount changing at any point. It, therefore, makes budgeting easier. 

However, a variable rate could cost you less if interest rates end up lowering, but similarly, if they end up increasing, you’ll likely notice a significant increase in your monthly payments. If you haven't prepared for such an increase, you may find yourself in a position where you cannot keep up with your payments.

It's up to you to determine which rate is best for you. What works the best for someone may not necessarily work for someone else, so our advice is for you to carefully examine your choices.

A fixed interest rate is often recommended since it allows you to budget more effectively and eliminates the chance of interest rates increasing. A variable rate, on the other hand, might benefit you if you're ready to take the chance and your finances can tolerate higher monthly payments if rates go up.

What Are the Best Car Loan Interest Rates UK

Before submitting a financing application, compare interest rates. Because not all lenders provide the same interest rates on their loans, some deals will be preferable to others. The interest rate you are eligible for is mostly determined by your credit score; the higher your credit score, the lower your interest rate. Even if you don't have a perfect credit score, it is still a good idea to compare interest rates by using comparison sites and determining which products are best for you.

In general, the smaller the percentage rate, the better. If you're given a rate of 5% or less, you'll know you're receiving one of the best deals available. The bottom line is that the interest rate you receive will be determined by your credit score and the amount your lender is willing to offer. Unfortunately, at time of writing the interest rate are on an upward trajectory so expect good rates to look higher than this for a while at least. 

Rates of 5% or less are considered very good for car loans. The thing is, you will need to have a really  good credit score to qualify for this rate. Otherwise, the lender can charge you higher interest rates to make up for how risky they view you to be as a borrower. 

Our tip is to go for a car loan that doesn't exceed 10% of your monthly income. That way you’ll never find yourself in a situation where you’re having trouble paying for your basic expenses because of your car finance contract. You can always check the monthly repayments for a particular sum borrowed and length of term using a fixed rate car loan calculator. Then you will have a good idea of what to expect and can budget accordingly. If things do become unmanageable do contact your lender straightaway. You do not want to get to the point where you have to default on your payments as this can really damage your credit score for several years. You maybe able to extend your term or you might have to ask to terminate the agreement. Check out our guide on how to get out of a car finance agreement here. 

Some lenders provide cheaper interest rates that are highly competitive. While the goal is to find the lowest interest rate possible, it is useful to understand what a typical interest rate for any automobile looks like. To do so, you must determine the precise value of the vehicle you wish to purchase, add any additional expenses including warranties and registration, deduct the amount from the deposit, and then compare the figure to the rates offered by auto loan companies.

Your ability to find the best car loan interest rates in the UK will be heavily dictated by your credit score. A higher credit rating entitles you to lower interest rates and cheaper monthly payments. 

Having said that, there are several car finance providers to watch out for that provide competitive rates. Alphera, Blue Motor Finance, and, of course, Carmoola are among them. Our rates start at 6.9% (at time of writing). 

The Bottom Line

A variety of factors might influence the interest rate you pay as a car finance borrower. As previously stated, cheaper interest rates are typically available for larger loans. As a result, if you just borrow a modest amount, you will almost certainly face a higher interest rate.

Your credit rating will also have a significant influence on the interest rates you are given. If you have a good credit score, lenders will regard you as a reduced risk and will be willing to lend to you at a lower interest rate. In contrast, if you have a low credit rating, you will be considered to be a bigger risk to lenders and may only be able to obtain less competitive interest rate offers.

What do you do if you have a bad credit score and want a car loan that’s not hugely expensive? Well, the best thing is to start working on your credit rating before you send out your application. There are several approaches to this. Get on the electoral register, for example, if you aren't already. Maintaining your current loan and credit repayments can also help you improve your credit score. 

Need credit score help? Check out the Carmoola blog! 😎🚗