Low APR car finance

Looking at car finance deals? You should pay close attention to APR, it can be the difference between a good deal and a bad one

John Evans
Apr 23, 2020

APR - three letters that might not mean much to many drivers in search of car finance, but which can mean the difference between a good, reasonable or very bad deal. APR stands for Annual Percentage Rate, a figure that takes into account the rate of interest at which the money is being lent plus any additional borrowing charges - such as compulsory fees for starting or completing the finance contract. The higher the APR figure, the greater premium you're paying to borrow money.

Be aware that while the APR figure takes into account compulsory fees, it doesn't factor in extra charges that may be issued for missing payments or for add-ons such as payment protection insurance. It's best to check the cost of any add-ons or other charges that may result from breaking the agreed contract terms before signing up.

The APR figure is the most useful number to use when comparing the value of similar finance deals - and lenders must publish these when offering finance such as Hire Purchase or PCP finance deals. A used car finance deal at 6.9% APR, for instance, will cost you around half as much in interest as one at 13.9% APR. So, if you're taking Hire Purchase, PCP finance or a loan, and are comparing two cars with the same cash price, the one with the lower APR should cost you less in interest/charges.

Bear in mind that there are two types of APR: representative - or the advertised rate - and personal, which is the actual figure you end up paying. This reflects your situation and credit score and could be the same as the advertised rate, though it may be higher - if you don't meet the necessary finance criteria, for instance.

How do you get low APR on car finance?

Getting a low APR car deal depends on several factors. Firstly you need to shop around to find a car that is available with a low APR deal. Secondly, you are likely to need a strong credit score to be able to take advantage of the best deals with the lowest APR figures.

Typically, the lowest APR car finance is available on new cars. This is because car manufacturers often subsidise the finance, with low APR finance effectively being offered instead of a discount on the cash price of a new car. However, remember that new cars have the highest cash prices, so while you may not pay that much in interest, the car itself is likely to be more expensive than an equivalent nearly-new or used car.

As a result, you may be able to get a 0% APR - also known as interest-free credit - finance deal on a new car, though this will usually rely on you having a particularly strong credit score. Rates of 2.9%, 4.9% or 5.9% APR are more common. Since how much interest you pay is affected by three things, however - the APR, the amount of money you borrow and how long you borrow it for - new cars on finance with low APR can still cost you a lot in interest, as you're borrowing a high amount.

Meanwhile, used car finance typically comes with higher APR charges than new car finance, though the cash prices are much lower - so the absolute amount of interest you pay may still be lower than with a new car. BuyaCar typically offers finance from 6.9% to 9.9% APR on a broad range of cars, though even some car manufacturers charge as much as 14.9% APR or more on their used cars and those with lower credit scores may have to pay 25% or even 50% APR in some cases.

Why is APR important?

No one wants to pay more in interest than they have to. Therefore, finding the lowest APR finance on the car you want should cut your bills. When thinking about APR you have to bear in mind the cash price, too. That's because a low APR finance deal on a car with a high cash price can still be very expensive.

Since how much interest you pay is not only affected by the APR figure but the amount you borrow and how long you borrow for, choosing a used car with a lower cash price can still save you money compared with a new car with low APR but a high cash price. In both cases you'll end up paying less in interest by going for a shorter contract.

As an example, you'd end up paying the same in interest whether you chose a £20,000 new car with 5% APR finance or a £10,000 used car at 10% APR. The higher cash price, meanwhile, means that the new car ends up costing far more per month, as you've borrowed more money and have more to pay back, even if only a small proportion of this cost is made up of interest charges. This means that to reduce the overall amount you pay in interest and reduce your monthly payments, you need to focus on cars with both a reasonably low cash price and low APR figure.

New car finance: £20,000 car at 5% APR (36-month Hire Purchase contract)

Deposit: £0

Monthly payment: £598

Total amount payable: £21,543

Interest charged: £1,543

Used car finance: £10,000 car at 10% APR (36-month Hire Purchase contract)

Deposit: £0

Monthly payment: £321

Total amount payable: £11,543

Interest charged: £1,543

APRs for borrowers with a strong credit rating generally start at 6.9% on used cars. In fact, this is BuyaCar’s lowest rate. For the average borrower, BuyaCar’s APR is around 9.9%, although other lenders may charge notably more than this. Zuto, for instance, offers 12.9% APR for those with an excellent credit score, while some car manufacturers charge as much as 15.9% APR on used cars. People with a poor credit rating, meanwhile, may be offered anything from 29.9% APR to as high as 49.9%.

The higher the APR, the quicker interest racks up. Go for a longer contract with a high APR and even more interest mounts up. This is the case when the cash price of two cars with different finance offers is the same. If the car has a higher cash price, meanwhile, interest builds up even quicker, as you've borrowed more money.

Look at the table below for an indication of how higher APR charges can quickly increase both your monthly payment and the overall amount of interest you have to pay on a £15,000 car financed on Hire Purchase over 48 months. Since the lowest APR is available on new cars, remember that to take advantage of the lowest interest charges you typically have to purchase a new car, which increases your monthly payments.

Therefore, when comparing finance deals on new and used cars - or cars with different cash prices - it's worth getting like-for-like finance quotes (the same type of finance with the same deposit, contract length and mileage allowance) to see not only which one costs the least in interest charges, but how the monthly payments compare.

APR Charge

Monthly payment

Total cost

Total amount of interest

0% NEW: Available on some new cars

£312.50

£15,000

£0

2.9% NEW: Commonly available rate

£331.35

£15,904.91

£904.91

6.9% USED: BuyaCar lowest rate

£358.50

£17,207.91

£2,207.91

9.9% USED: BuyaCar typical rate

£379.72

£18,226.50

£3,226.50

12.9% USED: Zuto lowest rate

£401.67

£19,280.08

£4,280.08

15.9% USED: Citroen: some used models

£424.34

£20,368.15

£5,368.15

29.9% USED: What Credit – poor credit

£539.22

£25,882.46

£10,882.46

49.9% USED: Aspire Money – bad credit

£726.54

£34,873.86

£19,873.86

 

 

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