Are all car finance interest rates fixed?

Interest is the price you’ll pay when borrowing money to buy a new or used car.

While in a small number of specific cases some 0% car finance deals are available, the vast majority of agreements will ask you to pay a percentage of your total loan as added interest each year. This is known as the interest rate.

In return, you’ll be able to spread the cost of your new wheels across affordable monthly repayments over a period of between one and six years.

Interest and APR are often used interchangeably but they are slightly different. APR stands for annual percentage rate and represents the amount you’ll be charged each year for your car finance. It includes any interest due as well as admin charges and additional costs. When weighing up different loan options, APR can provide a useful point of comparison.

But APR isn’t the only thing that can affect the amount of interest you’ll pay on your car finance, both monthly and overall. These figures will also depend on whether it’s a fixed or variable rate.

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What’s the difference between fixed rate and variable rate interest?

Most car finance deals are offered with a fixed interest rate. This interest rate will be based on several factors including your credit score, payment history, amount to borrow, and loan term length.
Fixed rate loans are predictable; the interest charged won’t change during the loan term and your monthly payment amount will stay the same.
Variable interest rates are more commonly offered on mortgages but can sometimes cross over into the world of car finance too.
Unlike fixed rates, variable rates are subject to change. As well as taking your individual circumstances into account, they are also affected by the base interest rate as set by the Bank of England.
If the base rate goes down, your monthly payments will likely go too. On the other hand, if the base rate increases, so will your repayments. And it’s not just your monthly payments, these fluctuations can impact the total cost of your car finance too.

What are the pros and cons of fixed rate car finance?

If you like to know exactly where you stand, especially when it comes to your finances, a fixed interest rate might provide peace of mind. But predictability isn’t the only thing you’ll need to consider with this type of interest:


Pros of fixed rates

  • It could be easier to budget – with no nasty surprises
  • Can suit a longer loan term where market conditions are likely to change
  • Widely available when looking for car finance


Cons of fixed rates

  • Can be more expensive in the long run if the base rate drops
  • May come with a higher initial interest rate

What are the pros and cons of variable rate car finance?

Variable rate car finance can be more unpredictable, but it also has several other advantages and disadvantages to keep in mind:


Pros of variable rates

  • The initial interest rate offered can be lower than a fixed rate loan
  • If the base rate falls, you could have reduced monthly repayments


Cons of variable rates

  • If the rates increase, you could face higher repayments and struggle to keep up
  • Rates can rise unexpectedly

How common is variable rate car finance?

Most car finance loans are offered with fixed interest rates and variable rates are quite rare.

Whether you’re looking for a hire purchase (HP), personal contract purchase (PCP), personal loan, or personal contract hire (PCH), you’ll likely be quoted a fixed interest rate and a fixed monthly repayment amount.

If you think a variable rate deal would be the best option for your circumstances, you might be able to find a loan, but your options may be limited. This might also restrict the variety of options you may be eligible for if you have a poor credit score.

How can I choose the right one for me?

The good news is that there’s no right or wrong decision when it comes to choosing a fixed or variable interest rate. The best choice for you will depend on your individual financial circumstances, attitude to risk and wider economic conditions.

Here are a few things to consider before signing your car finance agreement:

How much the interest will cost

Fixed rates can come with higher interest rates initially, which may make them more expensive than a variable rate loan.

Your risk tolerance

If you enjoy the security that comes with knowing exactly how much you’ll spend on your car finance each month, then a fixed rate might be better suited to you. On the other hand, if you’re happy to navigate the uncertainty of a variable rate, taking the risk might mean you’ll save on payments in the future.

The UK economic conditions

The Bank of England base rate is influenced by UK market conditions. If inflation is on the rise, it’s likely that the base rate will also be increased to help stabilise the price of goods. If a recession is looming, the base rate may be lowered to help stimulate the economy and encourage spending.

Your affordability

If you’re already stretching your budget to its limits to cover your monthly repayments or you’re self-employed with an unpredictable salary, a fixed rate might be the better option. Having a variable rate could mean facing a sudden payment increase that you’ll struggle to afford.

Your loan term

If you’re looking to spread the cost of your car finance over four or five years, it’s worth keeping in mind that a lot can change during that time. The economy can shift, and the base rate can rise or fall in response. A longer loan term with a fixed rate may be a safer bet than a variable rate that’s likely to change over the years.

How do base interest rates affect car finance?

The base interest rate is determined by the Bank of England and the decisions they make influences every other interest rate offered in the UK. Any changes to the base rate are typically made in response to the wider economy. If inflation is rising, for example, the base interest rate will likely be increased too.
If the base rate is increased, borrowing money will become more expensive. APRs will be higher, the total cost of car finance will increase, and your monthly payment amount will likely be higher too.
Already in a car finance agreement? If you’ve got a fixed interest rate, you don’t need to worry! Your interest rate will stay the same and your monthly payment amount won’t change.
It’s only when you reach the end of your loan, or you need to refinance that things might get more complicated. If you want to take out a new agreement to buy a new car, to change the terms of your current contract, or to cover the cost of the balloon payment in a PCP, you might find you’ll have to take out a loan with a higher rate of interest.

FAQs about fixed interest rate car loans

How will my credit score affect my interest rate?

While the interest rate you’re offered isn’t just based on your credit score, it’s one of the most important factors.

It’s all about risk. Your credit score tells lenders how well you’ve managed money in the past and whether you’re likely to make your new payments in full and on time. A good or excellent score will usually make you eligible for a low interest rate.

If you’ve missed payments or needed debt management support in the past, lenders might be concerned you won’t be a reliable borrower this time around and so will offer you a higher rate of interest to offset the extra risk.

How can I be approved for a lower interest rate?

The good news is that credit scores aren’t fixed, and you can take steps to improve your credit score. You might also qualify for a lower interest rate if you reduce the amount you need to borrow (by buying a cheaper car or putting down a bigger deposit) or opt for a shorter loan term.

Credit scores aren’t an exact science, but you will be able to work towards improving yours if you:

  • Make payments on time
  • Register on the electoral roll
  • Keep your credit utilisation percentage low
  • Avoid having too many hard searches on your credit file in a short time

What’s the difference between representative and actual APR?

The representative APR is used to explain the cost of borrowing money and can make it easier to compare different loans.

When a car loan is advertised with a representative APR this indicates that at least 51% of borrowers will receive a rate that is equal to, or lower than, this rate.

There’s no guarantee that the representative APR will be the same as your actual APR; depending on your individual circumstances, you could make up part of the 49% who receive a higher interest rate instead.

Your exact APRs will usually be dependent on your individual financial situation and credit score. Typically, you’ll only find this out once you’ve made a car finance application and undergone a hard credit check, which may affect your score.