When it comes to buying a car on finance, you will more than likely be expected to pay some interest on top of your loan. The interest rate is included in your monthly payments and choosing the wrong deal can make car buying more expensive than it needs to be. There are a few factors that can affect your interest rate offered and if you want to save money on car finance, it can be worth knowing how to lower the interest rate offered. Interest rates can fluctuate throughout the year so it’s worth keeping an eye on the current base rate of interest too before you start applying.
What is an interest rate?
Interest rates tell you how much it costs you to borrow money. Car finance deals involve borrowing money from a trusted lender who will abide by the current interest rate to reflect the cost of borrowing. When interest rates are higher in the UK, it means it’s more expensive to borrow money, but it means you can make more money on your savings accounts. Interest rates are also set based on the individual applicant too and they can vary from customer to customer.
There are a few factors that can make your interest rate higher so it’s worth considering the below points before you start applying.
Buying a Car on Finance – Lower the loan term.
When you apply for car finance, you can choose how long you’d like to pay your loan over. Typically, car finance can be spread over 3-5 years. You can tailor your loan term to your budget and choosing a longer budget can reduce the monthly payment. However, a longer loan term usually increases the interest rate because you are taking longer to get the money back to the lender. Where possible, you should try to choose the lowest loan term for your budget to help save money on interest rates.
Buying a Car on Finance – Choose a newer car.
In many cases, buying a brand-new car can actually get you a lower interest rate and many brand-new cars even come with 0% interest to pay! This is of a trade-off though as the loan amount will be higher due to the value of the car. However, if you were looking to get low or 0% interest, deals such as PCP car finance can allow you to spread the cost with low monthly payments. Much of the loan is differed until the final balloon payment which only needs to be paid if you wish to keep the car.
Buying a Car on Finance – Compare Finances packages.
There are a few different ways in which you can finance a car in the UK. Depending on your personal circumstances, you may be better suited to one form of finance over others. You can either get a personal loan, take out a hire purchase deal or get a car through Personal Contract Purchase. Each have their own structure and it can be a good idea to compare rates for different types of finance to see which could offer you the lowest interest rate available.
Buying a Car on Finance – Protecting Your Finance with Gap Insurance
When arranging car finance, it’s also worth considering additional protections like Gap Insurance. This type of cover ensures you’re not left out of pocket if your car is written off or stolen, as it pays the difference between your insurance payout and the amount you still owe on your finance agreement. Factoring in this safety net can give you extra peace of mind while you focus on securing the lowest possible interest rate.
Buying a Car on Finance – Improve your credit.
Your credit score and history are really important when it comes to getting a car on finance. Your previous credit behaviour is a good indicator of which type of borrower you will be in the future. Missed or late repayments in the past increases the risk to the lender as you’re more likely to default on your future loans. Lenders set higher interest rates for those with bad credit and tend to reward customers with excellent credit histories with the lowest rate as they are less of a risk. You should check your credit before you start applying for finance and see if you could improve your score to get a better rate.
Buying a Car on Finance – Put down a larger deposit at the start.
Many car finance agreements may require a deposit to be put down at the start of the deal so this is one you should consider regardless of interest rates. Putting more down at the start of your deal means you are lowering the loan amount and it reduces how much you need to pay back. A smaller loan can be less of a risk to lenders as you’re more likely to be able to pay it of faster and it can help to decrease your interest rate.
*Collaborative post
About Debz Louise
Debz Louise is a UK-based lifestyle expert and the founder of several lifestyle blogs. Specialising in everything from interior design and home renovation to body-positive fashion and parenting, Debz brings a wealth of hands-on experience to every guide. Her mission at Stereotude is to simplify the modern world for her readers through expert curation and fiercely honest advice.