Car finance rates: what counts as low interest?

Baffled by interest rates and APR figures? Get to grips with what counts as low-rate finance here, so you can spot the best deals

Matt Rigby
Jul 9, 2021

Car finance interest rates vary a lot and for a number reasons. New car finance often involves low-rate finance, with car manufacturers often charging a high price for the car itself and then offering discounted finance to make the monthly payments more affordable. Meanwhile, used cars have lower prices, but typically come with slightly higher interest rates.

Car finance rates are typically expressed as an Annual Percentage Rate - or APR - which takes into account the interest plus other compulsory charges. Figures start at 0% - which is equivalent to interest-free credit - and can run as high as 20% or even higher in some cases.

Typically, the majority of finance rates for used cars range from around 6.9% APR to around 15% APR. Aside from some providers offering better value finance than others, the worse your financial history, the more interest you can expect to have to pay, with lenders charging more interest to those people who have less record of paying back borrowing on time.

The main factors that influence the APR rate you pay are your personal credit score and the size of deposit you’re able to pay upfront. The better your credit history and the more of a track record you have of paying back borrowing on time, the lower the interest rate you can expect. Putting down a larger deposit also reduces how much risk you pose to a lender - as you're borrowing less - so this also can reduce the interest rate you have to pay.

One final thing to bear in mind is that it's important to look at the interest rate alongside any other incentives or discounts. If you're considering several cars, get like-for-like finance quotes (with the same type of finance, deposit amount, contract length and mileage allowance) and then you'll be able to directly compare the monthly payments to see which is better value for you.

You may find a new car with 0% APR, meaning that no interest is charged, which seems like good value on paper. However, this offer may miss out on deposit contribution discounts that could be available with other deals that charge interest, which may work out cheaper overall. The result can be that an interest-free car finance deal may not be the cheapest option. If in doubt getting like-for-like quotes should show you how the costs compare.

Finding a car finance deal with a low interest rate can make a significant difference to the amount a car costs overall if you’re paying for it on finance. For this reason you shouldn’t only look at the cash price of the cars you are considering to work out your costs - getting comparable finance quotes can be the simplest way to make direct cost comparisons between different finance options or comparing deals on different cars.

Read on for more information about how to find the lowest car finance rates for your situation.

Make sure you have a good credit score

One of the biggest factors that will determine the interest level a lender will offer you, is your personal credit rating. In essence, the better your credit score, the lower the finance rate you are likely to get, as lenders use your credit score - i.e. your recorded financial history - to get a sense of how much you are likely to be able to afford and how much of a risk you are.

There are a few things you can do to help tidy up your credit score, too. Tricks such as making sure you are on the electoral register, closing any joint accounts you might have with someone with a poor credit history, and generally ensuring that credit reference agencies have up-to-date and accurate information for you should make a positive impact.

But even if you don’t have a great credit score, you will most likely still be able to take out car finance. However, the rates available to you will inevitably be higher.

Spend more: a bigger loan can mean lower rates

This one’s basically simple maths for the finance companies; the larger the amount of credit you take from them, the more money they make from you on interest payments.

As a result, just like buying multipacks in bulk at the supermarket, lenders will incentivise you to spend more (ie take out more finance credit), by offering you lower interest rates.

Find as much cash for a deposit as possible

Although a large deposit won’t specifically affect your loan rate, going for a slightly bigger deposit may enable you to take advantage of lower interest rates than would otherwise be available.

Furthermore, the bigger your deposit, the lower your monthly payments and the less you will have to pay overall - as you're borrowing less money, so there's less interest to pay.

What APR means

APR is short for ‘Annual Percentage Rate’ and it refers to the way the overall cost of finance is calculated. It takes into account the interest charged on the credit, plus any standard fees that might be added on top of the interest, over the course of a year.

In general, the higher the APR, the greater premium you have to pay for taking out finance. Be aware, however, that deposit contribution discounts aren't typically taken into account in the APR. Therefore, if you're comparing several finance options - some with deposit contributions and others without - it's best to get like-for-like quotes to see which option has the lowest monthly payments.

What representative APR means

Most car finance APR rates will be advertised as what’s called ‘representative APR’. This is the lowest percentage APR rate that a particular lender is able to provide on a particular product.

By law, the lender must accept 51% of applications at this APR rate. The other 49% could be offered finance at a higher, more expensive rate.

The issue here is that you shouldn’t assume you’ll get that lowest rate - only just over half of applicants do. The rest could end up with a finance rate that is much more expensive.

Why 0% APR deals aren’t always cheaper

If you find a deal on a new car with 0% APR, it could well be a good deal, but you need to look carefully at all the other aspects of the offer. For example, manufacturers and dealers can offer deposit contributions - which effectively work like a discount - or other sales incentives such as zero-deposit offers, servicing discounts or warranty deals.

Often, these extra incentives don’t apply to finance packages with 0% APR, so you’ll need to consider this when calculating the overall cost of the finance. You’re also less likely to be able to negotiate an outright price discount with a 0% APR deal. 

In order to work out what deal’s best for you, it’s worth shopping around and comparing like-for-like deals wherever possible - i.e. with the same type of finance, deposit level, mileage limit and contract length - so you can work out what deal will represent the best value.

0% APR deals on used cars

As with a new car on a zero-interest deal, getting used car on finance via a 0% APR deal does instinctively feel like a good-value proposition, but this is not always the case. The key with used cars on 0% APR deals is that, although the credit is free, the dealer may increase the price of the car to account for this and make sure they make money on the car.

Therefore, although you’re not paying any formal interest, you could still end up paying more over the course of the finance term than for a similar, better-priced model with a reasonably low-percentage APR deal.

The key here, as with new car deals, is to get like-for-like quotes in order to highlight which cars and finance choices offer the best value for you. To do this, you should compare quotes with the same type of finance agreement, deposit, mileage limits and contract length.

Can you get good car finance rates if you’re self-employed?

Getting car finance if you’re self-employed often means going through more checks to prove affordability, but provided you pass these, you are likely to be extended credit at similar rates to those who are employees.

For example, you may need to provide business trading accounts, tax returns or bank statements to prove you have a consistent financial history and don’t spend more than you earn.


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