Car finance interest rates and APR explained
If you're looking to buy a car with finance, it's important to understand car finance interest rates and APR. These rates decide how much extra you will pay on top of the loan amount when borrowing money for a car.
Understanding financial jargon can be confusing, but we’re here to help. In this guide, we’ll explain car loan APR, how interest rates are decided, and how we may be able to help.
What do car loan interest rates mean?
If you’ve ever wanted to borrow or save money, you’ll probably have heard about interest rates. But what do car finance interest rates mean exactly?
In car finance, the interest rate is the charge you pay to borrow money from the lender for your car. It will usually be shown as a percentage of the total loan amount. The higher that percentage is, the more you’ll have to pay back.
You can find out how much interest you’ll pay over the loan term by comparing the difference between the amount you borrowed and the total repayment figure. That difference will be the amount you pay to the lender to compensate them for losing the use of that money while you’re borrowing it.
How are car finance interest rates decided?
In the UK, the base interest rate is set by the Bank of England, which affects the rates set by banks, building societies, and independent lenders. That’s why even small changes in the base rate can have a big impact on borrowing and saving. If you’ve taken out a fixed rate loan, the interest rates will stay the same throughout the length of your agreement's fixed rate period, no matter what happens to the base rate. A fixed rate could be a pre-defined period of time, or the full duration of the loan. Your credit agreement will confirm this information.
When you apply for car finance, lenders will assess your application and if they are able to help, they will offer you an interest rate specific to your circumstances. Each lender has their own criteria and various interest rates available.
What is car finance APR?
APR (Annual Percentage Rate) is the total cost of borrowing money. It includes the interest rate plus any extra fees charged by the lender. Over time, APR is only charged on the outstanding debt rather than the original full loan amount.
When looking at car finance APR rates, you may see two types:
Representative APR – This is the rate that at least 51% of people will get.
Personal APR – This is the actual rate you are offered, which may be higher or lower than the representative rate, depending on your credit score.
A representative APR is used to show you how much you might have to pay on an advertised loan. It’s not guaranteed; at least 51% of successful applicants will get the representative rate or lower but some might receive a higher rate.
The APR must be provided by the lender before you sign a finance agreement with them so you can use it to compare car finance options and decide which could be the best deal for you.
Car loan APR vs interest rate
APR is different from the interest rate, although they are closely related.
Interest rate refers to the cost of borrowing money, expressed as a percentage of the loan amount. It only accounts for the interest charged on the loan.
APR includes the interest rate plus any extra fees (such as lender charges or admin fees). This makes it a more accurate measure of the total cost of borrowing.
Example:
A dealer might offer an 8% interest rate with one of their lenders, but if there are additional fees, the APR may increase.
This means APR gives a more complete picture of how much you’ll pay overall.
When comparing car finance rates, it's always best to look at APR rather than just the interest rate, as it shows the true cost of the loan.
To get an idea of the interest you might pay on a car, use our handy car finance calculator.
What affects the car finance APR I’m offered?
APR rates offered depend on several factors including the UK’s base interest rate, the risk that the loan might not get paid back, and the length of the loan term.
Other factors include:
Credit score – A higher score could mean a lower interest rate. A lower score may lead to higher costs. However, lenders will also look at other aspects of your financial profile.
Loan term – Shorter terms (e.g. 3 years) may sometimes come with lower interest rates than longer loans (e.g. 5 years), but this will depend on individual circumstances and lender criteria.
Deposit amount – A bigger deposit reduces the loan amount and may lower your APR.
Lender & product type – Different lenders and finance options (like HP, PCP, or personal loans) offer different rates.
Car type & age – Some lenders charge more interest on older used cars because they are seen as a higher risk.
A borrower with a good credit score that is thought to be low risk will likely receive a lower interest rate than one with a poor credit history that represents a higher risk to the lender.
Looking to escape bad credit? The good news is that there could be steps you can take to improve your credit score over time.
The takeaway
When choosing car finance, always compare car finance interest and APR rates to get the best deal.
Before signing a finance agreement, read the terms carefully so you understand the full cost of borrowing. Whether you're using PCP, HP, or a personal loan, securing a low APR can save you money in the long run.
To discuss this in more detail, give us a call and we can talk you through your options.