Car finance: What is APR?

APR figures compare finance costs, reflecting the interest and fees charged. They don’t account for deposit contribution discounts, though

By BuyaCar team February 1, 2024

APR stands for Annual Percentage Rate and in theory should give you an indication of the true cost of car finance. This figure takes into account the interest charged on a loan plus any additional fees - which may not always be obvious.

The higher the APR rate, the more you’ll pay overall. Lenders calculate APR using a standard method, so it’s the best way to compare quotes.

Every car finance quote should include an APR figure, whether you're taking out PCP finance or alternatively buying on Hire Purchase (HP).

You won't find an APR figure if you're leasing a car because this type of contract works in a different way, since you have no option to buy the car with a lease and you're not borrowing money but paying for temporary access to a car - as with car rental.

There is a big problem with APR figures, though. Deposit contribution discounts - which for new cars could amount to many thousands of pounds - aren't taken into account in the APR figure.

This means that if a deposit contribution is offered on a car, the APR figure shown will be higher than the real premium you're paying to finance the car.

That's because this finance discount effectively covers some of the interest charged and in some cases the deposit contribution is large enough to outweigh all of the interest. Meanwhile, an identical car and finance setup with no deposit contribution available may have the same official APR figure but would cost far more in reality.

Consequently, the most reliable way to compare the costs for any finance deals is to get like-for-like quotes for different models with the same type of finance, the same deposit, mileage allowance and contract length. 

How do you get the lowest APR for car finance?

The cost of car finance you get depends largely on your credit score, as finance companies use this to work out the risk of lending you money. The lower the risk you pose, the lower the APR charge you can expect to be offered.

Your risk level is established using factors such as your history of repaying credit and the stability of your position - whether you have a permanent job, own a house or are listed on the electoral roll, for example.

Those with the highest credit scores can expect the lowest APR car finance, whereas having a low credit score will increase the rates you're offered, with 0% APR deals - also known as interest-free credit - likely to be unavailable.

Be aware, however, that 0% APR offers aren't always the best value option, as alternatives with a higher APR figure plus a large deposit contribution could prove cheaper. Getting like-for-like finance quotes will show you which specific option gives you the best value.

In some cases, increasing the size of deposit on your car finance can decrease the APR available as well, because you'll be borrowing less money, reducing your risk to the finance company and meaning that if you were to miss any payments, selling the car would be more likely to cover the outstanding debt.

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What is 0% APR?

No interest and no extra fees. 0% APR finance means that you only repay the amount that you borrow, so there's no penalty in taking out finance, compared with buying outright - at least on the face of it. 

In reality, many 0% APR deals aren't quite the bargain that they may seem. For example, many offers aren't available in conjunction with other discounts, including savings on the cash price or deposit contribution incentives. In this scenario, the price of the car is effectively higher that with other deals, so you may be saving less than you think.

In some cases, you may even pay more with 0% APR. This may be the case if a large deposit contribution discount is offered with a deal where interest is charged, for instance, though no discount is available when taking the interest-free credit option.

Should the deposit contribution exceed the interest charged, a 5.0% APR offer could cost you less than a 0% APR option, therefore. This is sometimes the case even on a new car, from the same manufacturer - where multiple types of PCP finance are available.

That's why it's always worth exploring all of your options and getting like-for-like finance quotes with different deals to see which offers you the best value. See our list of the latest 0% APR car deals for more information on some of the best deals currently available.

APR on new car finance

As well as 0% APR deals, manufacturers typically offer low-interest deals on new cars, so you might be offered finance at 2.9% or even 1.9% APR, which would result in you paying very little interest.

However, new cars nearly always come with dramatically higher list prices than even a one-year old equivalent, so they may still cost you substantially more per month than a cheaper used car with a higher APR charge, as the amount you're financing is likely to be substantially higher.

As with 0% APR deals, low-interest new car deals may not be available in conjunction with other discounts, so it's worth getting like-for-like finance quotes to determine exactly which car or offer gives you the best deal.

APR on used car finance

Without the manufacturer finance discounts that are offered on new cars, you're extremely unlikely to find 0% APR finance on a used car - and if you do, the cash price is likely to be artificially high to compensate for what the dealer or finance company loses by not charging interest. However, competitive APR figures are still available.

Make sure you compare the APR available to get a truer picture of what you're paying rather than the lower 'interest rate', which doesn't include all the charges that may be issued when taking out finance.

All PCP and Hire Purchase finance quotes should include the total amount payable which will enable you to compare deals, reflecting the full amount you'll pay if you make all of the monthly payments. Plus, in the case of PCP finance, the optional final payment to take ownership of the car.

Bear in mind again, that deposit contributions are typically not taken into account in the total amount payable figure. If a deposit contribution is offered, subtracting this figure from the total amount payable normally shows what you'll pay overall.