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Making sense of car finance rates

Making sense of car finance rates
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You may have decided that car finance is the way to go to purchase your new set of wheels. But how do you know if you are getting a good rate? And are 0% deals really too good to be true? We’re here to break down everything you need to know about car finance rates, from where to find the best ones to whether you would qualify for a 0% deal.

What is a ‘good’ rate?

Competitive or ‘good’ interest rates for car finance depend on how much you’re borrowing. Strangely, when it comes to car loans, the bigger the loan you get, the cheaper the rate.

However, you should only look to borrow what you need. The loan amount threshold is only something to bear in mind if you are on the cusp. For example, if you only need to borrow £4,900 but going up to £5,000 could dramatically reduce the rate, it could be worth doing.

Currently, in the UK, interest rates for loans between £3,000 and £4,999 are around 8% to 9%. When you go up to a loan amount of between £5,000 and £7,499 rates drop to between 3% and 4%. And if you need to borrow between £7,500 and £15,000, then you can even get a loan rate that is below 3%.

Obviously, interest rates are important when it comes to car finance. But also remember to look at how much your monthly payments would be, and the total cost of borrowing.

How can I find a good rate?

When it comes to car finance, it is often advantageous to secure a good rate before committing to buying the car.

Dealerships have finance deals they can offer you. But these deals may not have the most competitive rates available, or you may be required to make a substantial down payment. Often, dealers will be keen for you to take this option as they will earn more commission if you take out their finance plans.

However, if you source your own finance before approaching a dealer, you give yourself the freedom to shop around. And you can also compare like-for-like products to find the best deal.

When it comes to interest rates, having a ‘good’ credit score can be key in securing the lowest rate available. If you are unsure what your credit score is, you can check it out at Experian, Transunion or Equifax.

If you are in the fortunate position of having a good credit score, using comparison sites can be a good way of seeing what’s available. On these sites, you will most likely be able to use a car loan calculator, which will help show you how much your monthly payments will be and the total cost of borrowing on any given loan.

When comparing loans, look at the APR. This shows the cost of borrowing over a year, and will help you to compare like for like. It will also include any administration fees that may be included with the loan.

Bear in mind that it is a ‘representative’ APR. This means that only 51% of people accepted for the loan will get that rate. Others may be offered less favourable interest rates depending on their circumstances.

If you have a poor credit score, your finance options may be limited. Instead, if you are looking ahead to needing car finance in the future, maybe look to improve your score. Check out some top tips in our article on how to improve your credit score. Or, if you have no credit history at all, here are three things you can do to improve your chances of getting a car loan.

How do 0% deals work?

A 0% car finance rate means that you won’t be charged interest on the amount you borrow. You will only be required to pay a deposit, followed by a series of monthly payments. You will typically find them on personal contract purchase (PCP) and hire purchase (HP) agreements.

Not paying interest on your finance deals sounds great. But there are a few things to bear in mind.

1. This type of deal usually requires a substantial deposit – as much as 40% in some cases. Not everyone is in a position to take advantage of such a deal.

2. These deals tend to be available on new cars. They’re also available on cars that the dealer is struggling to sell. We’re talking cars which have been painted garish colours, or which have been fitted with unpopular extras. If you are not fussy, then you may well secure yourself a bargain, but it takes away some of the choice.

3. You will need a good credit score to qualify for most 0% deals. So if you have a less than squeaky clean credit report, you may struggle to secure a 0% deal.

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