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How to look at APR’s when financing your car

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Almost everybody has heard about APR’s but how do they work and what should you look out for when financing a car?

What is an APR?

APR stands for Annual Percentage Rate which are all the costs involved in purchasing the vehicle expressed at an annual rate or, in more simple language – the amount of interest you will pay annually on any money borrowed. Think of it as a measure of the cost of funds you are borrowing.

APR is a handy way of comparing one finance provider against another as it creates an equal playing field for you so that you can cost and compare different finance offers.

By law, any credit consumer agreement must have the APR on it and it must be placed in a prominent position and stand out from the text around it. This is to counter poor sales practices in years gone by where the likes of dodgy car salesmen would profit by getting extra commission if they managed to get a customer onto a high rate of commission.

An APR is different from an interest rate as all fees and charges are included in the APR so you are getting a true reflection of what the money is actually costing you rather than a headline rate.

The Representative APR is something that lenders use to provide you with an upfront estimation of what the average user of their services pays in APR. In essence, this means the lowest rate that 51% of successful applicants will get when accepted on the particular finance deal. In practice that means that while over half will get this rate, the other 49% are likely to get a higher rate when their own specific credit application is reviewed so when you see Representative APR, this is not necessarily the rate that you will get when you apply but it serves as an up-front guide.

What is a good APR?

So what is a good APR? There is no exact answer to this other than ‘the lowest one you can get’. As it is based on your own credit score and which lenders will accept you it’s a very personal and specific thing.

Saying that, there are some parameters that you can use to gauge if you are paying too much in interest though these will also depend on the type of finance mechanism that you choose be it Personal Loans, Personal Contract Plan (PCP), Personal Contract Hire (PCH) or Hire Purchase (HP).

Personal loans

Sometimes you see headline rates of 2.9% APR or 3.0% APR. These are generally for personal loans and if you are fortunate enough to have an excellent credit history then you may qualify for them through your bank or even on the open market. They are unsecured loans in that they are for cash, paid into your account and not secured against an item like a car. Some prefer to take out personal loans and then use this cash to buy cars and it’s a perfectly acceptable way to finance though you will not benefit from being able to hand back the car as with PCP or PCH.

Car finance through a mortgage

Sometimes you can roll the cost of a car into your mortgage by applying for a further (or additional) mortgage against your house and then use this to pay for a car with cash but please beware that these payments are secured against your house and would be set over the remainder of your mortgage term which could be decades down the line so all this time you would be paying interest on the loan, which could turn into a very expensive finance option.

0% APR deals

Franchise car dealers and manufactures often have finance deals on cars though you should be wary in that in some cases these offers are designed to sell cars which they are having difficulty moving or where a new model is due out soon. These deals can often be very attractive with 0% APR offers occasionally available though, in many cases, if you had paid cash for the car you could have negotiated a substantial discount so be careful you are comparing apples with apples.

APR with third party lenders

If you are going for more conventional finance such as a PCP deal, and your credit score is excellent to amazing then you are likely to pay in the vicinity of 6% to 11% APR depending on how you bargain and if you are near-prime (basically meaning you have good credit score but not perfect) then expect to pay from 12% to 19%.

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 bad or poor credit history and there are also the option of guarantor loans which are normally set around 45-50% but please be wary of these as the guarantor themselves is likely to qualify for a much better rate if they took out the finance themselves in their name.

The difference APR makes

The difference in what people with different credit scores pay is huge. For example, if one was to borrow £10,000 over five years on an APR at 7% you would pay back approximately £11,880 but if you did the same at 50%, expect to pay a whopping £27,360 with a difference of around £15,480 between two people borrowing exactly the same amount of money!

So how do get around this? It pays to make sure that you go with a broker that has a wide range of vehicles and also a large lending panel in order to ensure that you get the best rate possible.

Hippo Motor Finance has thousands of lease deals and hundreds of new, nearly new and used cars in stock. We also have a huge panel of 14 lenders ranging from the best prime lenders through to near-prime and for applicants with a poor credit history, we have access to five specialist sub-prime Lenders meaning that if you are accepted, it’s likely to be by more than one lender and we can help you get the best rate.

Likewise, for those with an excellent credit history, we have a number of proven lenders on the top end which means you are well placed to get the best prime APR rate available.

At Hippo Motor Finance, we use soft search in the first instance and we deliver nationwide plus all of our cars come with a warranty in place so you can be sure you are getting a good deal with Hippo.
Check if you’ll be accepted by one of our 14 lenders with our free, instant soft search tool. Call 01254 956 777 to discuss your car finance requirements with Hippo Motor Finance today.

Representative Example of Credit

We expect more than 51% of our customers to achieve this rate.

Loan Amount Total Cost of Credit Representative APR 60 Monthly Payments Deposit Amount Loan Term Total Amount Payable
£7,500 £3831 19.1% APR £188.85 £0 60 Months £11,331

All offers are subject to change at any time, you must be 18 or over and finance is subject to status, vehicle availability and terms and conditions apply. We can introduce you to a limited number of finance companies, a commission may be received. Failure to maintain payments may result in termination of your agreement and the vehicle being returned, this could affect your credit rating and make it more difficult to obtain credit in the future. All prices correct at time of publication.

We purchase a wide variety of vehicles from all over the country to ensure the best quality and value for our customers, all of our cars go through a thorough inspection process and if they do not meet our standards we do not sell them. We endeavour to inform our customers (where possible) the provenance of the vehicle they are buying and as such we will always inform you if the vehicle has previously been either an ex fleet or hire car. Should your vehicle be an ex hire/fleet car please do not be concerned as we would never value this vehicle differently when you come to part exchange it and there is no difference to the CAP valuation either.

You should try and estimate the distance you will travel as accurately as possible to try and avoid excess mileage charges at the end of your contract.

All pictures and/or photos and car descriptions on this site are for illustration and reference purposes only and are not necessarily the vehicle on offer. All offers are subject to change at any time and are subject to finance approval and vehicle availability. All prices correct at time of publication. E & OE.

Hippo Vehicle Solutions t/a ‘Hippo Motor Finance’ is authorised and regulated by the Financial Conduct Authority. FRN 658076. We are a Credit Broker not a Lender and can introduce you to a limited number of lenders. We typically receive a fixed commission calculated by reference to the vehicle model, product or amount you borrow, for introducing you to a lender but this does not affect the interest charged on the agreement, all of which are set by the lender. All offers are subject to change at any time and are subject to finance approval.

We endeavour to ensure that all information including the specifications and finance availability are accurate. Whilst we make every effort to display correct information we are aware that errors may occur occasionally. We are not able, therefore, to guarantee the accuracy of all information especially when given to us by third parties. If you do require clarification of some information you have seen on our website, please email us at info@hippomotorgroup.com . This does not affect your statutory rights.

We are a broker not a lender and our registered office is Unit 26 Trident Park, Trident Way, Blackburn, BB13NU.