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Car finance interest rates explained
Car Finance

Car finance interest rates explained

Car Finance interest rates can be one of the most confusing aspects to funding a new or used  car, especially with the variety of funding options available and varying amount they may charge. Car finance generally involves you borrowing a set amount to buy or ...
Neil Thomason
February 2022
Car finance interest rates explained

Car Finance interest rates can be one of the most confusing aspects to funding a new or used  car, especially with the variety of funding options available and varying amount they may charge.

Car finance generally involves you borrowing a set amount to buy or fund the purchase of a car (usually minus a deposit and/or dealer contribution), with an Annual Percentage Rate (APR) added to this cost to get the total price to pay. This is then divided into monthly payments.

Personal Contract Purchase car finance interest rates

PCP deals are the most popular way for people to finance a car, and feature ‘representative’ APR on top of the On The Road price. 

As you are essentially taking out a loan against the purchase of the car, APRs are interest on this loan. The Advertising Standards Authority require that over 50% of applications must get the advertised APR rate, so it is at the seller’s discretion as to what rate they offer.

Whereas the final balloon payment to own the car at the end of the term will be based on its depreciation, the car finance interest rates will be based on the total price of the vehicle ‘as new’.

Hire Purchase car finance interest rates

Hire Purchase car finance interest rates work in much the same way as PCP. The major difference between HP and PCP is that you are working to pay off the whole value of the car at the end of the agreement term (with the final value fee typically as low as £1).

Although it is now a somewhat antiquated way of funding a car purchase, it has become one of the best models for purchasing a used vehicle. The car finance interest rate is a set APR for the term of the deal, with the finance company owning the vehicle until it’s paid off as security against the loan. This means you will end up essentially paying more than the cars purchase price when the interest rates are factored in, and certainly more than the car will be worth at the end of the deal.

Loan car finance interest rates

A personal loan to fund the purchase of a car is another option some use. This requires a better credit score than is usually required for Hire Purchase, and circumvents any mileage restrictions on PCP deals as you own the car (even though you’re liable for the debt).

Once approved for a loan the funds will be released to you allowing you to purchase the car at face value. Of course, you’re likely to have to pay interest rates on the loan with the term structured to pay off the car at the end.

Interest rates on personal loans vary depending on the lender, be it a bank or another lender, and also vary depending on your credit score.

Which car finance interest rate can I get?

As touched on above, a variety of factors can impact how much interest you pay on your car purchase. Your credit score might be the main factor, as the higher your credit score is the less risk you are to lenders. Furthermore, the higher the loan the lower the APR tends to be. If your credit score is poor, it will limit the amount of competitive interest rates available to you.

At Hippo Motor Finance, we have a large panel of lenders, including specialists who help those with bad credit.

Initially, we only ever use a soft search to find a deal for you in order to protect your credit rating.

Check if you’ll be accepted for car finance today by using our no obligation soft search tool here: