Many car finance agreements usually require you to pay additional interest on top of your loan. Usually, 0% interest car finance deals are reserved for new cars and in most cases than not you will pay some form of interest. Interest rates vary from customer to customer and can be affected by a number of factors. Interest rate are set by the lending company and affects how much you will pay overall for your chosen car finance agreement. Let’s take a look at how car finance interest rate is calculated and how you can help to lower your rate.
What is a car finance interest rate?
Your interest rate offered determines how much you will pay in addition to the cost of the vehicle. A lower interest rate means you will pay back less overall. Interest rates are often confused with Annual Percentage Rate (APR), but they are different. Interest rate determines the cost of borrowing whereas APR is the annual cost of borrowing APR also includes additional costs and fees. Your interest is added to the total amount and then split into monthly payments.
How to lower your interest rate:
Interest rate on car finance agreements are really important, a higher interest rate means you will pay back more money overall. There are a few ways in which you can help to lower your interest rate offered.
Good credit
Having a good credit score can help to lower your interest rate. Lenders usually require you to pass a credit check before you are accepted for finance. A credit check enables lenders to see what type of borrower you are. Having a good history of making payments on time and in full means you are less likely to default on your future payments. This reduces the risk to the lender and can mean you get a better interest rate. If you have a low credit score, you could consider increasing your score before you start applying for finance. Bad credit car finance is possible, but you may receive higher interest rates offered than those with better credit. This in turn will increase how much you pay overall.
Deposit contribution
Some car finance agreements require you to put down a deposit, usually around 10% of the cost of the loan. There are many no deposit car finance agreements that don’t need a deposit but putting down a deposit can have a number of benefits. Putting more in for your loan means that you don’t have to borrow as much from the lender and can reduce your monthly payments. A larger deposit can also reduce your interest rate offered. This is because taking out a smaller loan with the finance lender reduces the risk that you won’t be able to pay it back on time.
Shorter term
Car finance agreements are usually spread across 1-5 years and some finance agreements even let you spread the cost over 7 years! However, the length of your finance agreement can determine your rate of interest. Choosing to finance your car over a shorter term can reduce the amount of interest you pay and can help to lower your rate. You should try to choose the lowest possible finance term. However, a shorter term can increase your monthly payments as you are paying it off faster. You should make sure that you can afford to meet the monthly payment each month on time and in full.
Cheaper vehicle
As mentioned above, choosing a lower amount to finance can also reduce your interest rate. This means you could save on interest when you opt for a cheaper vehicle. New cars can benefit from 0% interest rates but usually the cost of the car will be much more than a used car finance. The age and type of car you choose can determine your interest rate so it’s best to shop around for low rates first.