Car Loan Interest Rates Explained

If you’re thinking about taking out a car loan to buy your next car, it’s important to understand interest rates. In our guide, we’re focusing on what car interest rates are, how they work and what you can do to get a lower rate.

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Top FAQs:

What is interest on a car loan?

The interest on a car loan is the amount you are charged for borrowing the money. It's shown as a percentage of the total amount of the loan. When you pay back your car loan, your monthly repayments include both the loan amount (the principal) and the interest.

Use our car loan calculator (link when live) to discover how different interest rates affect your monthly repayments.

How do car loan interest rates work?

When you take out a car loan, what you end up paying is determined by the interest rate. You borrow a set amount to buy your car and the interest is then added to get the total amount you’ll pay. This is then divided into monthly payments.

The interest you are charged each month on a car loan is based on the current balance of the loan at that time. At the start of the loan when the balance is higher, you are paying off a higher proportion of interest each month. As you pay off the balance with your fixed monthly payment, the interest being charged each month becomes lower and the balance starts to reduce quicker.

It’s important to find a car loan that works for your circumstances and has an affordable interest rate for your budget.

What affects the interest rate on a car loan?

A range of factors affect the interest rate you’ll be offered and all of these are based around your personal circumstances, including:

  • Size of the loan: bigger loans generally come with lower interest rates, but it does depend on the lender.
  • Length of the loan: shorter loans usually have lower interest rates whilst longer terms often mean higher rates.
  • Credit score: if you have an excellent credit score you’ll likely be offered lower interest rates compared to a lesser credit score.
What’s the difference between interest and APR?

You’ll have seen both interest rates and APRs when looking into car loans, but what’s the difference?

APR is simply an overall estimate of what you’ll pay on top of your loan when you apply for it, including the interest rate and any charges. The interest rate provides the exact total you’ll actually pay on the car loan.

Are car loans cheaper than car finance?

If you have a strong credit score, a car loan would likely have a lower interest rate and be cheaper in the long run. If you have lower credit score and have struggled with borrowing in the past, you may get a better deal with car finance. If you have very low credit score, your options may be more limited.



Tips to reduce your interest rate

You can look to reduce your interest rate by:

- Comparing various car loan deals: before signing up to a loan, compare as many loans from different lenders as possible. Different lenders may be willing to offer you better interest rates.

- Opting for a shorter loan: you’ll usually be offered a lower interest rate for a shorter loan, but you will pay higher monthly repayments. It’s important to get the right balance between interest rate and monthly repayments.

- Improving your credit score before you apply for a loan: lenders will often be more willing to offer you lower interest rates if you have a good credit score. Simple things like registering for the electoral roll and closing any unused credit accounts can give you a quick boost. If you have a credit card, make sure you keep up with payments each month.

- Not making too many loan applications at the same time: each time you apply with a lender for a loan it will show up on your credit history. Too many applications in a short space of time can be concerning for lenders.

We’re here to help

At Asda Money, we can help you find the right loan for your needs through our carefully selected panel of trusted UK lenders.

All it takes is one eligibility check and then you can compare quotes from across our lender panel to find the one that best fits your needs. If you want some more information on how to better manage your finances, discover the Financial Support at Asda Money. We can also help with your car insurance, too.

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