Variable Rate Interest: Car Finance Jargon Busters

Are you wondering if you can you save more by getting car finance with a variable interest rate instead of a fixed-rate interest? 🤔 Then it's great that you have hopped onto our blog to check it out!  Unlike fixed-rate interest car finance deals, the ones with variable interest rates are dependent on the base rate or bank rate, and what's on offer will depend on how strong your credit profile is. But you need to know that this type of interest rate can fluctuate throughout your car finance agreement and can go up or down -  and can therefore affect how much you get to spend or save on your financed car. 

How Variable Rate Interest Works

Variable interest rates depend on an index, like a bank rate. The bank rate is set by the Bank of England, which then creates a ripple effect on the interest rates that other banks and financial institutions charge. In most cases, lenders and car finance companies use the bank rate when applying their margins. 

Your credit score also plays an important role in the variable interest rate that the lender will charge. For example, if you have a low credit rating, it usually results in a higher interest rate. But if you have an excellent credit score, your chances of getting a good deal is better. 

Throughout the duration of your car finance agreement, you might want to keep an eye on the bank rate for any changes and fluctuations so you can anticipate how much you need to pay for your monthly car finance repayments. If the bank rate goes down, your interest rate will also decrease. Conversely, if the bank rate increase, expect your variable interest rate to go up as well. 

Getting the Best Deals with Low Interests

How do you find companies with low interest rates? Finding affordable car finance deals depends on several factors, such as the type of car finance you want to get, your credit score, the make and model of the car you want to buy, and the interest rate set by the car finance company. 

If you want to get the best deals, it’s important to do your research and shop around. Bear in mind though that this doesn’t mean making multiple car finance applications. Only actually apply for car finance if you think you have found the one for you and feel you have a high chance of getting approved. Each application for credit requires a hard check on your credit report, which knocks off a few points from your credit score. If better to check out their deals, ask for a decision in principle first, as this will only involve a soft credit search. 

Set Your Budget First

Before making an important decision like buying a vehicle through car finance, you need to know how much you can afford to set aside each month for the payments. Many experts advise that the budget for car finance repayments shouldn’t exceed 10% of your monthly income. 

When shopping for a car, it’s best to know the amount you can put into making repayments so that you can easily identify which cars are within your budget. Apart from the payments themselves, you also need to take into account the other costs of owning a car. This includes fuel or electricity costs, insurance, breakdown covers, road tax, and servicing/maintenance, amongst others. 

Assess Your Credit Report

As mentioned previously, the strength of your credit profile plays a significant part when lenders determine how much they’ll charge for the variable rate interest. Before you apply for car finance, allocate some time to review your credit report and evaluate your credit score. Know whether your score is poor, excellent, or can still be improved. 

You’d want to get the best chance of getting approved for credit when you do apply for car finance so you might want to boost your credit score first. Start by checking your credit report to see if there are any errors in your information like your name and address. Next, go through the transactions to see if they’re all accurate. If you spot suspicious transactions, contact the credit reference agency immediately so that they can look into them. 

Improve Your Credit Score

If you have a poor credit score or maybe you’re a young driver who doesn’t have enough credit history, there are a number of ways you can improve your credit score. Start by registering for the electoral roll so that your information and address will be on record. When lenders check your personal information, they’ll verify them, and simply being a registered voter can add points to your credit score and increase your chances of getting approved. 

Next, pay off any outstanding debts before applying for another financial product. If you have any records on your credit report such as arrears, defaults, and county court judgments, they’ll stay there for up to six years. Try to straighten things out with lenders where you still owe money. Do your best to pay off your previous loans and show good faith that you want to honour your obligations with those lenders. 

Use a Car Finance Calculator

If you’re wondering about how to calculate the interest rate on car financing, you don’t have to worry about making the computations yourself. Today, many lenders provide a car finance interest rate calculator on their websites. You only have to set your budget for the deposit, and the length of the agreement, and then play around with the figures to see if the result fits your finances. 

However, the car finance calculator can only give you an estimate of how much financing a car would cost because the final amount would only be given when the lenders have fully evaluated your application, but it’s still worth using because as you’ll have an idea of the amount you need to set aside for the repayments. 

Takeaway

Between a fixed-rate interest and a variable interest rate for car finance, the best one depends on your financial situation and how much you know about the trends in the economy. Are interest rates going up, down or staying stable? Can you afford to take some risk and still be able to cover the higher repayments if the interest rate goes up? If so, and you are looking a downward or stable trend in interest rates, then there’s no problem with getting car finance with variable rate interest.

However, if you prefer to have a predictable amount for your monthly repayments, fixed-rate interest is more suitable for you. Before signing any car finance agreement, always be sure to understand fully the terms and conditions, and be aware of what your obligations are as the borrower, so you can make ample provision to adhere to your financial obligations.