Car Finance

# What is an APR rate when buying a car? And how do I get a low APR loan?

May 2024

When looking to take out car finance, you’ll undoubtedly come across the term ‘APR’. It’s probably a term you’ve come across before in relation to credit cards or other loans as it’s regularly used when speaking about lending. But it can often be confusing to understand, leaving many baffled as to whether they’ll need to do complicated calculations to work it all out.

Here at Hippo, we like to make things simple when it comes to car finance, so we’ve put together a quick guide to explain it all, giving you the knowledge you need when you come to buy your car.

## What is APR when buying a car?

APR stands for ‘annual percentage rate’. It represents the total cost of your borrowing for the year, combining the interest rate and any additional charges of a loan and expresses them as a percentage rate. The APR makes it easier to compare products because it creates an equal playing field for you to calculate the cost of and compare different finance offers.

## How does APR work?

APR is different from an interest rate because all fees and charges – as well as the interest rate – are included within it. So, with an APR, you’re getting a true reflection of what a loan is actually going to cost you rather than a headline rate.

APR example

You want to buy a car for £12,000. You have a £2,000 deposit and want to spread the rest of the cost (£10,000) out over 3 years (36 months). The APR is 5.0%. This includes the interest rate as well as standard fees payable, such as an administration fee.

This would mean 36 monthly repayments of around £299.21, so a total cost of £10,771.58. So your total cost of borrowing (interest and fees) is £771.58.

As you can see, the APR is different from the interest rate, as it includes any additional fees or charges for the loan. It’s a true reflection of what the money is costing you to borrow.

## Representative vs personal APR

By law, any credit consumer agreement must have the APR stated with it, and it must be placed in a prominent position and stand out from the text around it. This makes it clearer for you, the consumer, to know exactly what the cost of borrowing will be.

Representative or typical APR refers to the rate that at least 51% of successful applicants will get on any given deal. In a nutshell, when you apply for a loan, the representative APR is the rate over half of applicants will receive. The remainder of applicants may be charged a higher APR depending on their credit history.

If you’re not offered the representative APR, you’ll be given a personal APR, which is a rate specific to your circumstances. A personal APR is based on your credit score and could be the same, higher or lower than the representative rate.

Flat rates are less common than APRs, but you can still find them around. They’re not quite as transparent as APRs, so it may seem like they’re a better deal. However, all finance issued in the UK has to have an APR rate, so always ask if you’re not sure.

The difference between a flat rate and an APR is that with a flat rate you’re charged interest on the original amount you borrow, regardless of how much you have paid off.

So if you borrow £10,000 over 3 years with a flat rate of 5%, you will pay 5% interest on that £10,000 every year. With APR, you only pay interest on the money you still owe, not the total amount.

## What is a good APR on a car loan?

If you’re going to get a car loan, a ‘good’ APR is, unsurprisingly, the lowest one you can get your hands on. As APR is based on your credit score, it often depends on your circumstances.

On top of that, it also depends on the type of finance you choose – personal contract purchase (PCP), hire purchase (HP) or personal contract hire (PCH).

0% APRs

Franchise car dealers and manufacturers sometimes offer 0% car finance deals – these are essentially interest-free loans.

Some may think there’s a catch to 0% car finance, as you’re not paying to borrow the money. While they’re not a scam, deals like this are harder to secure – and whether they’re the best option for you will depend on your individual circumstances.

To qualify for a 0% APR deal, you usually need an excellent credit rating. They often have other limitations, too, such as shorter terms and might only be available for new customers or on particular vehicles a retailer wants to promote. To ensure it’s right for you – as with any financial agreement – take your time to fully understand what’s involved and consider all the terms and conditions.

Low APRs

Sometimes, you’ll find headline rates of 2.9% APR or 3.0% APR. These are generally for personal loans and, if you’ve got an excellent credit history, you may qualify for them through your bank or another financial institution.

Personal loans are typically unsecured loans in that they’re cash paid into your account and not secured against an item like a car. Some buyers prefer to take out personal loans and then use this cash to buy a car rather than take on whatever APR comes attached to a finance deal. This is a perfectly acceptable way to finance a car purchase – just bear in mind that you won’t benefit from being able to hand back the car as with a PCP or PCH agreement.

Average APRs

If you’re going for more conventional finance such as a PCP deal (and your credit score is near perfect), you’re likely to pay around 6% to 11% APR.

If your credit score is near-prime (basically meaning you have a good credit score, but it’s not excellent), then expect to pay from 12% to 19%.

Higher APRs

Specialist lenders for those with lower credit scores kick in around the 20% APR mark, rising to 50% and even higher if you have a poor credit history.

There’s also the option of a guarantor loan, which is normally set around 45-50% – again depending on the credit score of the guarantor.

What’s an average APR for a first-time car buyer?

First-time car buyers can face higher APR rates, simply because they tend to be younger and have a lack of credit history.

If you already have a credit history and a good credit score, you may qualify for a good rate. Buying a new car at a dealership can often be the best option to secure your lowest rate, but remember affordability also comes into play – so make sure you can comfortably afford the repayments.

On average, if you have a good score, you should be able to find car finance for around 6% to 12%. If you have no credit history, you could be looking anywhere in the region of 20% and upwards.

## How to reduce APR on a car loan

There are a few different elements that will affect the APR on your finance package – and there are also some things you can do to ensure you get the best deal possible.

The type of car you choose

The age of the car you choose has an effect on the APR. New cars sometimes have the option of 0% finance agreements because they’re more expensive to buy. However, you need to have a very good – if not excellent – credit score to qualify.

The older the car, the higher the interest rate is likely to be. This is because a used vehicle’s value is harder to pinpoint, loan terms are typically shorter and the risk of mechanical faults is higher, all of which make the loan riskier to a lender.

So, if you want a lower APR, consider getting a new or a nearly-new used car.

Simply put, the longer you borrow money, the more interest you’ll pay. So, if your term length is very long, you’ll pay much more in interest overall – even if you find a low APR deal.

When deciding how long you want your finance agreement to run for, ideally you want a short term with a good interest rate. However, you also need to think about the affordability of your monthly payments, so the limit of your budget needs to come into play here, too.

Another factor is depreciation. A longer term loan also means the car may have less equity in it by the time you make your final payment. If you intend on selling or part-exchanging your car, this is something to think about.

Choosing the right lender

It pays to do your research when looking for the best APR. If you aren’t getting the money to finance your chosen car through private means, such as a family or friend, then typically you’ll be using a bank or credit union through a dealership.

Retailers like us will find you the best deal from the lenders they work with. Even if you have a less-than-gleaming credit rating, we have specialist lenders who can help find a deal that’s suitable for you.

The higher your credit score, the better the chance you have of being offered a lower APR. All finance applications go through a credit check, and if your score is too low you risk having your application rejected or being offered a deal with a higher interest rate.

The good news is there are many different ways to improve your credit score and have a better chance of being accepted for the most competitive deals.

### Short term fixes for improving your credit score

Be wary when applying for credit

It’s tempting when looking for a car finance deal to hedge your bets and apply to a few different places to see if you’re accepted. This is actually the worst thing you can do.

Every time you apply for credit, a check is carried out on your credit report. While one application won’t cause much damage, making multiple applications within a short space of time is a red flag to lenders, as it looks as though you’re desperate for credit. Activities like this almost always lower your credit score too.

The way around it is to first use a soft credit check like the one we offer. A soft credit check won’t impact your credit rating and you’ll be able to see which deals you’re likely to be accepted for. If you want to submit a proper application for finance after that, you’ll be subject to hard credit check that may affect you credit score, but you’ll at least have your soft check preapproval (assuming the soft check is successful) as marker that you’ll likely be formally accepted for credit.

Register on the electoral roll

If you don’t have any history of borrowing or credit, you can start by registering on the electoral roll. This not only helps lenders identify who you are and where you live, it gets you points on your credit score and shows stability.

Close any unused accounts and cancel any unused credit cards. Lenders take into account how much credit you have and, if you have a lot available, they may wonder why you’re applying for more.

Be careful, though. The overall age of your credit accounts also helps your score, as the longer you’ve held credit, the easier it is for the lender to make an accurate decision on your borrowing habits. So check the age of the account before you make the decision to close it.

Keep good financial habits

The most important thing you can do for your credit score in the short term is to pay back any debts regularly and on time. Missing or late payments can seriously damage your credit score. Keep trying to get your debt down by making regular payments and in turn you’ll see your credit score rise as it proves that you’re a sensible borrower who’s on top of their finances.

### Long term fixes for improving your credit score

There are two easy ways of improving your credit over the long term: use a credit builder prepaid card or a credit builder credit card. When used correctly, these can both be good ways of boosting your credit rating.

A credit builder prepaid card works as a type of loan by a prepaid card company. You sign a credit agreement for a certain amount and agree to pay a monthly amount to pay off the loan. For example, you could borrow £120 on a prepaid card and pay back £10 a month. This counts as twelve months of successful repayments, which in turn improves your credit rating.

The same principle relates to credit builder credit cards. If you continually pay them off monthly and on time, then you’re constantly building up your credit score. Be aware, though – there is a risk with these credit cards. As the APR on them is generally higher than normal credit cards, you may end up paying interest rates of over 30% in interest annually. To avoid this, ensure you pay off the agreed or in-full balance monthly.

## Can I apply for a car loan online?

Yes, you can. Many car finance lenders will offer you finance first and then you can find a car following that. Alternatively, you can find a car before you go to a lender to get it financed.

Or, you can find a retailer that can sort both the finance and car for you, which is where we come in.

## Get a great car and finance deal in one hassle-free package with us

With Hippo Finance, you can get your car and finance in one simple package. We’re big believers in the idea that everyone should be able to get a great deal on a car they love and are proud to be a bad credit specialist, helping customers with credit issues find a deal that works for them.

You can get started with us today by using our free soft credit check to see if you’re eligible for finance from our diverse panel of lenders. Applying takes just a couple of minutes and won’t impact your credit score.