Do higher interest rates affect the cost of car finance?
In the UK, the interest rate is higher than ever, and the Bank of England has increased the base rate a number of times in 2022. For people who are looking to get a loan or car finance, you may be wondering how higher interest rates in the UK will affect your rate offered. The UK car finance industry is more popular than ever, with the purchase price of new and used cars much higher than we have seen in recent years, not many drivers can afford to buy a car with cash. Car finance is an affordable way to fund your next car purchase and helps you spread the cost into payments that you can afford over an agreed term. The guide below has been designed to look at how car finance is affected by higher interest rates set by the Bank of England and how to help you get the lowest possible rate for your circumstances.
Why are interest rates higher?
The Bank of England base rate has increased a number of times in the UK. A higher interest rate set by the Bank of England influences a range of products in the UK such as loans mortgages and savings accounts. The Bank of England increases the interest rates when inflation is too high. The higher interest rates set to help slow down spending which will eventually help to level out the rate of inflation. This means that consumers and businesses will face higher interest rates when they borrow, and it may put many people off.
How does it affect car finance?
Unfortunately, for car finance customers, this means that they will usually be offered a higher interest rate than they would of at the time when the base rate was lower. Most car finance deals will require to pay interest on top, but it can be possible to get 0% interest rate on many new cars too. This is subject to approval though and dealers usually offer 0% when the cost of the car is higher too. So in many cases, it may not be the most cost-effective option for you. However, when it comes to car finance, for many people their car is their lifeline, and you may not have time to wait until the interest rate comes down before getting a car. There are also a number of factors which can affect your car finance interest rate which you can consider to help get the lowest APR for car finance possible.
How to prepare your application for higher interest rates?
Whilst the rate of interest set by the Bank of England can’t be controlled, there are other factors that can affect your interest rate. It can be worth working on your credit score, saving for a deposit, and reducing your loan term to help get you a better deal and save money.
- Save for a deposit
Some car finance deals may require you to put down a deposit at the start so it’s worth keeping in mind anyway. When you put more down at the start of your car finance deal, you are reducing the loan amount and making your deal more manageable. This can help to make your monthly payments smaller and However, if you need a car in a hurry you may not have the cash to hand and car finance with no deposit to pay may be better for your circumstances. It can still be beneficial as the cost is included in your deal instead.
- Increase your credit score
Your credit score does play a big role in the interest rate you are offered. Lenders use interest rates to help secure the deal. They usually reserve the best rates for people with good credit scores as they are less likely to default on their loans. A bad or low credit score can mean you have missed payments in the past, made late repayments or have high levels of debt. Sometimes car finance lenders may set higher interest rates for those with bad credit to help secure the loan as they are seen as more of a risk to lend to. It can be worth taking the time to increase your credit score before you start applying.
- Reduce the loan term
If you want to get an idea of how much car finance could cost, you can use a hire purchase car finance calculator to set your monthly budget, credit rating and loan term to get an idea of how much you could borrow. You may notice that increasing the loan term reduces the monthly payments, but it means you take longer to pay off your loan and owe money for a longer period. Choosing a shorter loan term can also help you to get a lower interest rate or you don’t have to pay interest for as long so it can help make your deal more affordable.
- Compare different cars
Your interest rate can also be affected by the amount you borrow. When you get a car on finance through hire purchase, the value of the car and interest is spread into equal monthly payments till the end of the term. This means choosing a higher value car can make your monthly payments more expensive. It can be worth exploring different cars within your budget to see which would be right for you. For many people getting an electric car on finance is the most cost-effective way to fund an EV as they usually have a much higher purchase price. It can be beneficial to compare PCP deals on cars too as they usually benefit from low monthly payment because most of the loan is deferred till the final balloon payment if you wish to keep the car.