In the UK, 2023 has seen some of the highest interest rate hikes for many years. When the base rate of interest increases, it makes borrowing more expensive for customers and interest rates on all loans or finance will increase too. Interest rates can also be affected by your personal circumstances too so it’s worth knowing which other factors affect interest rates when these interest hikes hit!
What is an interest rate?
Interest rates reflect the cost of borrowing and is the amount you are charged for borrowing money from a lender. Interest rates can affect car finance, mortgages, credit cards, credit accounts and more. Your interest rate will be shown as a percentage of the total loan and is usually how much you’ll be charged over the year. Your Annual Percentage Rate (APR) on a loan can be more accurate way of forecasting your monthly payments as it includes the interest rate and any other fees included in the loan.
How to lower your interest rate offered:
When it comes to financing a car, each customer’s loan will be completely different as they are offered based on your personal circumstances. There are a few factors which will affect your interest rate offered so it’s worth being aware of them before you start applying for car loans.
1. Choose a younger car.
The age of the car you choose, and the size of your loan will affect the interest rate you are offered. Brand new cars can come with the option of interest free car financing as the loan amount will usually be larger. The older the car you choose, or second-hand cars can have higher interest rates to pay. There are a number of reasons why used cars may have higher interest rates such as the fact they come with more risks and a higher likelihood of something going wrong with the vehicle. If you want to keep interest rates low, you should consider a brand new or nearly new car up to 4 years old.
2. Improve your credit score.
When you apply for finance, lenders will run a credit check on your credit file to see how good you are at managing your credit. Based on your previous behaviour they can make predictions about which type of borrower you’ll be in the future. In short, better credit means lower interest rates as you’re less likely to default on your loans. A good credit score makes borrowing cheaper and gives you more negotiation power with more lenders.
3. Get the lowest loan term.
Many drivers get carried away with focusing on the lowest monthly payment possible. When you choose a longer loan term, you will reduce the amount you pay each month, but you will pay interest for longer. A longer loan term can also affect the interest you are offered at the start of the deal, and it can be higher than if you chose a shorter term. When taking out a car loan, you should try to choose the shortest term possible within your monthly budget. Your monthly budget should be affordable each and every month as you will need to be able to meet all the repayments over the course of the term.
4. Put down a sizeable deposit.
A deposit for car finance can be required on many deals so it’s worth keeping in mind before choosing to finance your next car. The more money you borrow from a lender to get a car, the higher the risk of them not getting their loan back. A deposit contribution at the start of the agreement helps to reduce the loan amount and could help to reduce the interest rate offered. You could also use your current car as a deposit by part exchanging the vehicle to help get money off your next finance deal.
5. Shop around to find the right lender.
Some lenders may be able to offer better finance rates than others so it can be worth shopping around for the best deals. Jumping at the first car finance deal you are offered is a common car finance mistake and can be costly if you haven’t checked to see what else is being offered to you. It worth noting making multiple applications for finance in a short space of time can have a negative impact on your credit score. In order to compare interest rates and protect your credit, you could consider using a car finance broker to compare rates on your behalf.