Your car finance rate depends on your credit history, what you can afford, how much you borrow, how long you borrow for, the type of finance, the car and the lender's own pricing, while Bank Rate moves lenders' pricing up or down over time. That's why the APR in an advert can differ from the one in your own quote. Most of these factors are ones you can compare or change before you apply, so a high first quote isn't the final word.
Most car finance is hire purchase (HP) or personal contract purchase (PCP) rather than a loan, because the lender owns the car until the final payment, but this guide covers personal loans too.
The interest rate covers only the interest a lender charges, while the annual percentage rate (APR) adds any compulsory fees and shows the total as a yearly rate. You can think of the APR as the price tag for comparing agreements on the same basis.
A car finance quote can therefore show two different figures. For example, £12,000 over 48 months at a 9.9% fixed interest rate works out at about 10.4% APR, because of how the interest is calculated over the year. Add a £195 compulsory fee and the APR rises to about 11.3%. These figures are illustrative, not a quote.
Your credit history can raise or lower the APR you're offered, because it shows lenders how you've handled borrowing before. Missed payments, defaults or a county court judgment (CCJ) may narrow your choice of lenders and lead to a higher APR.
A thin credit file isn't the same as a poor one. If you haven't borrowed much before, a lender simply has less to go on.
The score a credit reference agency shows you doesn't decide your offer on its own. Each lender uses its own criteria. See what credit score you need for car finance for more.
Your income, spending and existing debts show a lender what you can afford, which affects whether you're offered finance and at what rate. Lenders have to check that you can repay without financial difficulty.
How you earn can matter too. Some lenders treat self-employed income, zero-hours contracts or a recent job change differently from a long-standing salaried job. They may ask for more evidence, such as bank statements or tax returns.
A joint application, or a guarantor where the lender allows one, may widen your options, though both people then share responsibility for the debt.
A bigger deposit or a cheaper car means you borrow less, which cuts the interest you pay at the same APR. A bigger deposit doesn't guarantee a lower APR, though. Some lenders set rates in bands by loan amount, so ask whether a bigger deposit would change your rate before you commit extra cash.
A longer term usually lowers your monthly payment but raises the total interest, if the amount borrowed and APR stay the same. The lender may also quote a different APR for a different term, so compare each quote's total amount payable.
Here's how a £15,000 car could look on HP at the same 12.9% APR. These are illustrative figures, not a quote, and they leave out any fees.
| Deposit | Amount borrowed | Term | Monthly payment | Total interest | Total repaid (excl. deposit) |
|---|---|---|---|---|---|
| £0 | £15,000 | 48 months | £396.44 | £4,029.12 | £19,029.12 |
| £3,000 | £12,000 | 36 months | £399.69 | £2,388.84 | £14,388.84 |
| £3,000 | £12,000 | 48 months | £317.15 | £3,223.20 | £15,223.20 |
| £3,000 | £12,000 | 60 months | £268.12 | £4,087.20 | £16,087.20 |
The £3,000 deposit saves about £806 in interest over 48 months. Stretching the same £12,000 from 36 to 60 months cuts the payment by about £132 a month but adds about £1,698 in interest. In real quotes, the APR may also change between these options.
HP, PCP and personal loans can carry different APRs because lenders price each product separately. Their structures also change what the same APR costs in total.
Hire purchase (HP) spreads the amount you borrow over fixed monthly payments, so the balance and the interest on it fall steadily.
Personal contract purchase (PCP) defers part of the balance to an optional final payment. Monthly payments are usually lower than HP for the same car, but the lender charges interest on that deferred balance for the whole term. At the same amount, term and APR, PCP usually costs more interest than HP.
A personal loan is unsecured, so its rate often depends more on your credit profile and the amount you borrow.
See what APR is on car finance and what counts as a good APR for how to judge a quote.
The car you choose can affect your finance rate through its age and mileage, any manufacturer offer on it, and the type of lender that finances it.
Bank Rate, the Bank of England's base interest rate, can influence the rates lenders set for new car finance. The Bank of England says lenders normally adjust their rates when Bank Rate changes, but each sets its own pricing, so a change won't move every quote by the same amount or at the same time.
A fixed-rate HP or PCP agreement keeps the same rate for the whole term, even if Bank Rate rises. Most HP and PCP agreements are fixed, but check yours to confirm. See whether car finance rates are fixed or variable.
Missed payments damage your credit history, which can mean higher rates the next time you borrow. The lender must first send a default notice – a formal letter giving you at least 14 days to put things right – and on HP and PCP, once you've paid a third or more of the total amount payable, it needs a court order to take the car back unless you agree.
If you're struggling, MoneyHelper offers free debt advice. See what happens if you default on car finance and giving the car back.
You can compare car finance offers fairly by checking your credit report first, then setting quotes side by side on the same deposit and term.
Once you have a personal quote, check its total amount payable against your budget before you make a full application.
