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by Marsh Finance on Aug 8, 2024 3:00:00 PM
Making Sense of Car Finance: APRs, Interest Rates, And Savvy Borrowing
When it comes to understanding “car finance interest rates” and “car loan APR”, things can get a bit muddy, right? Here at Marsh Finance, we believe that understanding the ins and outs of car finance shouldn’t be as challenging as finding your way through Manchester on a foggy day.
So, whether you’re a seasoned pro or brand new to the world of car finance, we’re here to guide you down the road, breaking down these complex topics into digestible chunks.
PCP And HP Car Finance, Unravelled
To start with, let’s get to grips with two common types of car finance: Personal Contract Purchase (PCP) and Hire Purchase (HP).
PCP is like a lease. You pay a deposit, make regular payments for a set period (usually 2-4 years), and at the end of it all, you can choose to hand back the car or buy it outright. The final payment to purchase the car is often called a ‘balloon payment’. This type of financing is great for those who fancy a new car every few years and aren’t too fussed about owning it outright.
HP is a bit more straightforward. You pay a deposit, make regular payments over a fixed period, and at the end, the car is yours. No balloon payment, no giving it back. HP is for those who want to own their car at the end of the payments.
Understanding Car Finance Interest Rates
So, you now understand the differences between PCP and HP. But what about interest rates? In simple terms, an interest rate is the cost of borrowing money. The interest rate is a percentage of the total loan amount that you’ll pay back on top of the amount you borrowed.
How Is Interest On Car Finance Loans Applied?
When you take out car finance, you agree to pay back the amount you borrowed plus interest. Interest can be fixed or variable. A fixed interest rate means the rate won’t change over the life of the loan. A variable rate might go up or down according to market conditions.
Calculating Interest: The Nuts And Bolts
Interest is usually calculated on a yearly basis. Here’s where “Car Finance APR” comes into play. APR, or Annual Percentage Rate, is the total cost of borrowing money over a year, including the interest rate and any fees. When you compare loans, you’ll often see the ‘Representative APR’. This is the rate that at least 51% of borrowers will get. It might not be the exact rate you’re offered, but it gives you a ballpark figure.
Interest Rate Vs Representative APR
So, what’s the difference between the interest rate and the Representative APR? In simple terms, the interest rate is the cost of borrowing the loan amount. The Representative APR is the interest rate that at least 51% of borrowers will receive. Here is an example of a Representative APR:
Representative Example
Rates from 12.9%
Representative example: borrowing £10,000 over 60 Months with a representative of 23.0% APR, an annual interest rate of 23.0% (fixed) and a deposit of £0.00, the amount payable would be 59 repayments of £269.58 per month, with one final repayment of £279.58 (which includes the option to purchase fee of £10.00), with a total cost of credit of £6,184.80 and a total amount payable of £16,184.80. Marsh Finance Limited are a lender, not a broker.
Marsh Finance Limited are a lender, not a broker.
This is for illustrative purposes only and is not a quote or an offer of finance.
What’s A Good Interest Rate For Car Finance?
Here’s where it gets subjective. A “good” interest rate can vary greatly depending on factors like the length of the loan and your credit score. However, the lower the rate, the less you’ll pay in interest. It’s always worth shopping around to find the best deal.
At Marsh Finance, our interest rates start at 14.9% and are based on certain factors like your credit score.
Factors That Influence Your APR
Your APR is influenced by several factors, including your credit score, the length of the loan, and the amount borrowed. The better your credit score, the lower the APR you’re likely to be offered. Longer loans can sometimes have higher APRs, as can smaller loan amounts.
How Your Credit Score Impacts The APR You’re Shown
Your credit score is like a report card of your financial behaviour. Lenders use it to assess how likely you are to repay the loan. If your score is high, you’re seen as less risky, which can mean lower APRs. But even if your score isn’t perfect, don’t worry. At Marsh Finance, we cater to the near-prime market, so a less-than-perfect score won’t necessarily count you out.
Did you know that you can find out if you’re pre-approved for car finance without impacting your credit score? Get your free personalised quote here.
Tips On Paying Less Interest
Want to pay less interest on your car finance? Here’s how:
- Improve your credit score: Pay your bills on time, reduce outstanding debt, and check your credit report for any errors.
- Choose a shorter loan term: While this means higher monthly payments, you’ll pay less in interest overall.
- Pay a larger deposit: This reduces the amount you need to borrow and, therefore, the interest you’ll pay.
- Reduce the amount you’d like to borrow: Reducing the amount you borrow can improve your affordability, which could enable you to achieve a lower interest rate.
Leveraging A Car Finance Calculator
Navigating car finance can be a maze. Enter the car finance calculator: a tool that gives you a quick, rough estimate of your monthly payments and interest rates.
Access our car finance calculator to get your budget.
Estimating Rates and Payments – This tool lets you experiment with variables like the car price, your deposit, loan term, and credit score. The result? A ballpark figure of potential rates and payments to guide you.
Experiment with Your Deposit – Your deposit amount can greatly impact your monthly payments and loan cost. By playing with different deposit amounts on the calculator, you can see how this changes your potential payment plan.
Informed Decisions – With these insights, you’ll be equipped to make savvy decisions about your car finance. The car finance calculator is a key to unlocking a clearer understanding of your potential agreement, allowing you to budget effectively and confidently.
Key Takeaways
Navigating the world of car finance might seem tricky, but it doesn’t have to be. From understanding the differences between PCP and HP to knowing how interest rates work and how they’re applied, you’re now equipped with the knowledge to make informed decisions. Remember, a lower APR is typically better, but always take into account the total cost of the loan.
By taking steps to improve your credit score and by considering factors like the length of the loan and the size of your deposit, you can help ensure you pay less in interest. It’s all about being a smart borrower.
At Marsh Finance, we’re here to help you every step of the way. Did you know that you can find out if you’re pre-approved for car finance without impacting your credit score? Click here to get your free personalised quote. Buckle up, start your engines, and let’s hit the road to better car finance understanding together.