You might know that a low interest rate is better than a higher one, but how does APR really affect a car finance deal? Our expert, Verity Hogan shares everything you need to know.
What is car finance APR?
APR is short for Annual Percentage Rate, and it tells you how much it’ll cost you each year to borrow money to buy a car.
It’s not the same as interest as it also includes any extra fees and admin charges involved in your loan.
So, why does it matter?
Well, it’s not just about understanding the cost of your car finance deal, APR can also help you compare different loan options to figure out which one works best for you.
In the world of car finance, most APRs are fixed rate, which means they won’t change during the loan term. As soon as your car finance agreement is signed, the rate agreed with remain the same for the following three, four, or even five years depending on your loan term length.
Variable APRs on the other hand follow the Bank of England base rate so can go up or down over time. That can be great if the base rate is low but could put you at risk if the rate suddenly starts to rise!
What’s the difference between a representative APR and exact APR?
When you’re browsing car finance websites, you’ll probably see one term pop up time and time again: representative APR.
It’s important to understand the difference between representative (sometimes referred to as rep) APR and the actual APR you’ll receive. It’s all too easy to see the adverts and let your imagination run wild.
The representative APR is there to let you know what kind of rate that lender can offer for car finance. The figure isn’t pulled from thin air as at least 51% of customers will receive this APR or lower but, of course, that also means 49% will be offered a higher rate.
That’s where your exact or personal APR comes in. This is the rate you’ll actually pay. It’s tailored to you and based on things like your credit score, income, and payment history.
What factors affect my APR?
APRs can be affected by a wide range of different factors, the state of the UK economy included.
But, on a more personal level, here are a few things that could play a part in the APR you receive:
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- Your credit score
The stronger your credit score, the lower the APR you’ll receive. As a young driver, you might not have a great credit score yet but that doesn’t mean you won’t be able to get a loan, you might just not qualify for the lowest possible APRs yet.
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- The loan amount
You might be able to get a lower APR if you’re not borrowing a large amount.
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- The loan term
A shorter loan term can sometimes come with a higher APR to make up for the interest the lender will lose with a shorter term.
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- Your car
The car you choose could also impact your APR. Newer models, for example, could be seen as a lower risk than older cars and might also have a lower rate incentivised by the manufacturer.
What is a good APR for car finance?
There’s no such thing as a good APR.
Well, that’s not exactly true, a low APR is a good APR, but there’s no set number that qualifies as good – it’s all about your personal expectations.
Depending on your circumstances, if you have a perfect credit history, for example, you might think a 5% APR is great, but if you’ve missed payments in the past and your credit score is looking a little worse for wear then a 14% APR might still qualify as good. It’s a matter of perspective and individual financial situations.
Can I get a 0% APR?
0% APR? No, your eyes aren’t deceiving you and yes, they do exist – you can find car finance deals where you pay no interest.
But before you run straight to your nearest dealership, it’s worth taking some time to look at the full picture – 0% isn’t always as great as it seems at first glance.
Firstly, these types of offers are usually restricted to brand-new cars. They might even only be available on the makes and models that haven’t flown off the forecourt, those cars that aren’t the most popular colour or don’t have the most wanted features. Essentially, they’re the last ones to get picked on the playground.
Brand-new cars are also usually more expensive than used models, so you’ll already be paying more upfront with a 0% deal. Check the small print and you might find that the 0% is only available for a limited time – and once it ends, you’ll be faced with a much higher APR.
The rule of thumb is that if it sounds too good to be true, it probably is.
How can I get a lower APR?
The good news is that you can take steps to improve the APR you’re offered (although it might not happen overnight).
Here are a few things you can try to get a lower car finance APR:
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- Improve your credit score
Credit scores can go up and they can go down. If you want to get yours heading in the right direction, you could improve your credit score by making all your payments on time, registering on the electoral role, keeping your overall credit utilisation low, and spacing out your hard credit searches.
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- Use a comparison site
With a comparison site like Young Car Driver, you can apply for finance with multiple lenders at once. Not only can this increase your chances of securing a deal, but it also means you can compare the options available and choose the lowest APR available.
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- Choose the right car
While some brand-new cars can come with special offers like 0% APR, generally speaking, cheaper models mean you won’t have to borrow so much and so can qualify for lower APRs.
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- Put a deposit down
The same principle as choosing a cheaper car, the more money you can put down upfront, the less you’ll need to borrow. The smaller the loan, the lower you APR you might be able to get.
