When it comes to borrowing money, interest rates are really important. Interest rates can affect how expensive your car finance deal could be and taking out a loan when rates are at their highest, could be costly. Interest rates are set by the Bank of England but, other factors can also affect how your car finance interest rate is calculated. When interest rates in the UK rise, find out below how to save money on your next car on finance.
Why do UK interest rates change?
The Bank of England is responsible for setting the base rate of interest to help keep inflation at target. The Bank of England reviews the UK’s base rate every six weeks and adjusts the rate accordingly. Interest rates started rising at the end of 2021 to slow down inflation but can change whenever a review takes place. When interest rates rise, it costs consumers more to borrow money and can affect mortgages, car finance, credit cards, and more. On the other hand, a higher interest rate can benefit your savings as it can boost how much interest you earn.
How do interest rates affect car finance deals?
If you choose a 0% car finance deal, you won’t need to pay any interest. However, these deals are usually only available on brand-new cars and may not be available to all applicants. The majority of car finance deals will require you to pay interest and your rate of interest will be determined when you get credit for a car UK. A higher interest rate can make your car finance more expensive and means you pay back more money to the lender overall. There are several factors that affect the interest rate offered and knowing what they are and why they matter can help to make car financing cheaper.
How do you get the lowest interest rate possible?
Unfortunately, when interest rates are high and you need a car, it can be hard to get the best deal possible but other factors calculate the cost of the APR you may be offered. Follow the tips below on how to lower your car finance interest rate.
1. Improve your credit score.
Your credit history has a massive impact when it comes to borrowing money. Based on your previous history of borrowing, lenders can determine which type of borrower you will be and see the level of risk. From the lender’s point of view, it’s all about the likelihood of them getting their money back on time and in full. Your history of borrowing can be used to determine this and if you’ve failed to stick to the terms of old agreements, you may find yourself with a bad credit score. Lenders tend to prefer applicants who have good credit and can be trusted to pay back their finances. As a reward, they usually reserve the best interest rates for people with good or excellent credit. If your credit is low, take some time to improve it before you apply for finance.
2. Choose a newer car or a larger loan.
A newer car is more likely to be offered with a lower interest rate or even no interest to pay. To customers, this can be attractive but brand-new cars usually have higher monthly payments so it can be worth weighing up whether it’s the best offer. Older cars tend to have higher interest rates attached to them so if you want to keep interest as low as possible, you could consider a higher-value car such as brand new or nearly new.
3. Shorten the loan term.
The beauty of car finance is that it can be tailored to your monthly budget. You will notice if you choose a longer loan term, your monthly amount will decrease because you are taking longer to pay the loan off. However, a longer loan term also means you will pay more interest as you are taking longer to get the money back to the lender. First, consider your monthly budget for a car and then see what the lowest loan term is you could take your finance over to help reduce your interest rate.
4. Use a car finance broker.
Many drivers still assume the best way to sort their financing is through the dealer. And whilst this can be quick and convenient, you may not be getting the best deal available. Most dealerships only work with a few select lenders who may not be getting you the best deal, or you may even be refused a car loan! A finance broker on the other hand has a finance-first approach and helps you find the lowest APR rate from their large lending panel. Brokers make it easy to compare multiple finance deals at once and help to secure the right deal for your circumstances. Once you have your financing in place, you can then shop for a car within your budget from a participating dealership.
5. Put down a larger deposit.
Some finance deals require around 10% of the deal as an initial deposit at the start of the agreement so it’s worth thinking about a down payment early on in the process. There can be many car finance deals with no deposit at all but putting more money down can help to reduce your interest rate. This is because you are lowering the loan amount, borrowing less from the lender, and creating more financial security within the deal.
