Interest Rate

Meaning and Definition

The interest rate, also referred to as the APR (Annual Percentage Rate), is the cost of borrowing money for a car finance loan or credit agreement. It represents the percentage of the loan amount that the lender charges as interest over a specified period. The interest rate is determined by various factors, including the borrower's creditworthiness, prevailing market rates, and the length of the loan term.

Why it is important to know

Understanding the interest rate is crucial when considering car finance options as it directly affects the overall cost of borrowing. A higher interest rate leads to higher monthly payments and a greater total repayment amount, while a lower interest rate can result in more affordable loan terms and potential savings over the loan term. It is essential to compare interest rates from different lenders to find the most favorable option.

Example in car finance

Suppose you are offered a car finance loan of £15,000 with an interest rate of 5% per annum and a loan term of 4 years. The interest rate of 5% means that you will pay 5% of the loan amount as interest each year. This results in an annual interest charge of £750 (£15,000 x 0.05). Over the 4-year loan term, the total interest paid would amount to £3,000 (£750 x 4 years). Understanding the interest rate allows you to assess the affordability of the loan and compare it with other offers to find the most cost-effective financing option.