How to get a low APR on a car loan.
When you take out car finance or a car loan, you’re more likely going to have to pay some form of interest on your deal. Understanding the factors which affect the rate of interest you could be offered by a lender can help you to find the lowest APR rate possible. Choosing the wrong deal with a high interest rate could be the difference between an affordable loan and one which may leave you out of pocket.
Understanding APR rates:
Annual Percentage Rate is the total cost of borrowing money for a year. It is important to compare APR as it includes the interest and other fees you can occur in the deal and gives you the most accurate representation of how much your car finance deal may cost. If you’re shopping around for a low APR, you may see a representative APR rate advertised. The ‘representative’ means 51% of customers received the same rate or lower than what is advertised. Don’t assume the lender with the lowest rate will offer you the same rate though as it can depend on your personal situation.
How to prepare for low APR rates.
There are several key factors lenders will investigate to determine the cost of borrowing. Things like your credit score, deposit contribution and how long you want to borrow money over can all affect your APR. Preparing for an application can help to streamline the whole car finance process.
- Check your credit file.
Before you apply for a loan, you should first see how your credit looks. If you’re not checking in on your credit score every month, it can be easy to lose track of the factors which affect it. You should check your credit and make sure all your information is accurate and up to date. If the information on your credit file doesn’t match that of your application, lenders may decline your application in the fear it is fraudulent.
- Improve your credit score.
If you check your credit score and find it’s a little on the low side, it can be a good idea to take some time to improve your credit before getting a car loan. Bad credit can put lenders off and your application may even be declined by a finance lender. If you do get a car loan with bad credit, you can be offered a higher interest rate because you are more of a risk to lend to. Using a car finance broker can help you to find the lowest APR deal when you have a low credit score but ultimately it can be best to improve your score first.
- Choose a shorter loan term.
Usually, a car loan can be over 3-5 years and is tailored to your budget. Choosing a longer term will reduce how much you pay each month but you are taking longer to get the money back to the lender so they may set a higher rate of interest. You should try to choose the shortest term possible with the highest monthly payment you can comfortably afford.
- Put down a larger deposit.
Car finance deals such as Hire Purchase can come with no deposit to pay but some may ask for a deposit of around 10% of the car’s value, so it’s worth keeping in mind. A deposit for a car loan can help to reduce the APR you could be offered because you are using it to lower the loan amount. Usually, the higher the deposit contribution the better but it can be best to put down what you can afford.
- Make overpayments.
If you already have a car loan, you could make overpayments to help bring your interest rate down. Overpayments are when you make another payment on top of your monthly payment. If you come into some money and want to help clear your loan faster, you can make over payments to do so.
- Refinance your deal.
If you’ve no choice but to take a higher APR finance deal right now, you could consider refinancing your loan in the future. Once you’re around halfway through your finance deal and have improved your situation, e.g. increased your credit score, you could try replacing your current loan with a one with better terms. This is called refinancing and is when you take out a new loan, maybe with a new lender but it could have lower payments or a lower interest rate.
