Open Menu

    What’s a good APR for car finance?

    a land rover parked up

    If you’re looking to sell your vehicle and buy a new one, you may be considering car finance to help with the purchase. Car finance, or car loan, is where you pay monthly instalments over a set period, instead of buying the car outright at the start. The car finance deal will have an APR, which you must consider wisely.

    APR, or Annual Percentage Rate, is how much it’ll cost you to borrow money each year. It includes interest and extra fees, and gives you an understanding of the actual cost of borrowing the money to buy your car.

    Understanding APR will help you accurately compare car finance offers and select the most cost-effective option. A lower APR means less interest over time, saving you money and making your car purchase more affordable.

    Read on to find out more.

    How APR works

    APR document
    APR may seem complicated at first. But once you understand it, buying your new car becomes less tricky!

    How to calculate APR for car finance

    Here are the five steps for calculating APR:

    1. Add the amount to be borrowed for the cost of the car to the total interest to be paid over the life of the loan.
    2. Add the extra costs and fees.
    3. Divide this amount by the number of monthly payments in the loan terms.
    4. Multiply this figure by the number of months in a year — 12.
    5. The result is your annual percentage rate or APR!

    Differences between representative APR and personal APR

    Representative APR gives a representation of the APR a rate lender will offer. They offer this rate to at least 51% of their customers. It provides a general idea of loan costs. 

    Personal APR, on the other hand, is tailored to you. It considers your credit score, income, and financial history, among other things.

    While representative APR helps you compare potential loan offers, your personal APR may be higher or lower based on your creditworthiness, affecting the overall cost of your car finance.

    The impact of your credit score on your personal APR

    Your credit score significantly impacts your personal APR. A higher credit score indicates to lenders that you’re a low-risk borrower, often resulting in a lower APR. On the other hand, a lower credit score suggests higher risk, leading to a higher APR to offset potential default. 

    Maintaining a good credit score can save you substantial amounts regarding interest over the loan term. Ultimately making your car purchase more affordable.

    Working out a good car loan APR

    a calculator and pounds
    The APR you’re offered is heavily influenced by your financial circumstances

    What’s a competitive APR in the current market?

    A competitive car finance APR in today’s market (at the time of writing, July 2024) typically falls below the national average, which hovers around 6% to 11%. Lenders offering significantly lower APRs than the national average are clearly on the lookout for borrowers with excellent credit scores and stable financial histories.

    Comparing low, average, and high APRs

    APRRateObservation
    LowAs low as 3%Available to borrowers with excellent credit
    AverageCurrently, between 6% to 11%Reflects typical market rates
    HighStart around 20%, rising to 50%Typically for borrowers with poor credit or limited financial history

    Factors influencing your car finance APR

    How your credit rating determines your car loan’s APR

    Credit ratings play a crucial role in determining your APR for car loans. Lenders assess your credit score to gauge your creditworthiness and offer an interest rate based on their assessment.

    A higher APR offsets their risk. Simply put:

    Higher credit score = Lower APR

    Lower credit score = Higher APR

    How new and old cars affect an APR

    🚘 New cars: Often qualify for lower APRs due to lower perceived risk and manufacturer incentives.

    🚘 Used cars: Typically attract slightly higher APRs, reflecting higher risk and depreciation concerns for lenders.

    Why understanding the difference between interest rate and APR is important

    Knowing the difference between interest rate and APR is crucial as it impacts the overall cost of borrowing. While the interest rate reflects the cost of borrowing the principal amount, APR encompasses additional costs like fees and points. This distinction ensures transparency in loan offers, helping borrowers accurately compare financing options and understand the total amount they will repay over the loan term.

    FAQs

    What does 0% APR finance mean?

    Usually seen in car dealerships, 0% APR finance sees you pay nothing in interest. These are interest-free loans where your money goes directly to paying off the car. This means you’ll pay the same amount as someone who buys the vehicle outright at the start.

    Is APR monthly or yearly?

    APR, or Annual Percentage Rate, is always annual. It represents the total cost of borrowing over a year, including interest and fees. Even though it’s a yearly rate, lenders often quote it to help borrowers understand the total cost of the loan over its term.

    What’s the difference between fixed and variable APR?

    The difference is quite simple! A fixed APR remains constant throughout the entire loan period until it’s fully paid off. A variable APR can fluctuate during the loan term, potentially increasing or decreasing.

    Is it time to sell your car?

    Want to learn more about owning, maintaining, and selling your car? Check out more of our guides here, covering everything from finding buyers, to negotiating a good price, and completing payment safely.

    Sell your car the Motorway way

    Find your best offer from 7,500+ dealers