In recent years, the number of drivers choosing to use car finance as a way to fund their next car purchase has increased massively! More people than ever are spreading the cost through finance, and it could be easy to see why. With the cost of new and used cars at an all-time high and the cost-of-living crisis 2022, drivers who need a car are less likely to be able to purchase one with cash alone. However, does this mean that car finance is too expensive? The guide below looks at the factors which affect the cost of cars and cars on finance uk and how to help get you the best deal possible.
How do car finance rates vary over time?
There are a number of factors that can affect how much your car finance costs. Most of the time your car finance is affected by personal circumstances such as your creditworthiness, history of borrowing, deposit contribution and the size of the loan. However, there are other factors that are out of your control that can affect costs. The Bank of England set their base rate of interest which reflects any type of borrowing in the UK. To help ease the cost-of-living crisis and to slow spending, the Bank of England base rate was higher than it has been for a long time in 2022 and 2023. This means it is more expensive to finance a car when rates are higher. However, if you need a car in a hurry or don’t have any money saved up, waiting till interest rates come down may not be an option for you.
Can you still get low interest finance deal when the cost of borrowing is higher?
Higher interest rates in the UK can unfortunately make car finance more expensive. Its also worth knowing that most car finance interest rates are fixed so the rate you accept no will stay the same throughout your agreement even if the UK’s base rate starts to fall. This can be beneficial if you already have a car on finance as you won’t be affected by higher interest rates. If you are wanting to change your car finance throughout the agreement, it can be best to wait until over half of the repayments have been made and then applying to refinance your current loan with a better term. If you are looking to get a car on finance now, there are a few factors in which you could consider to lower your finance costs.
How to get a better car finance deal when the UK interest rate is high:
Whilst higher interest rates in the UK can make borrowing more expensive, there are also a few other factors you could consider in the run up to your finance application to help make your deal more affordable.
Increase your credit score
Your credit score can massively affect your car finance deal. Having a low or bad credit score can indicate that you’ve struggled to meet financial commitments in the past and are more likely to default on future loans too. Many lenders may set a higher interest for you when you have a bad credit to help secure the deal. It can be worth working on your credit score to help get you a better finance deal and give you more negotiation power with different lenders.
Choose a cheaper car
Car finance deals such as hire purchase are calculated on how much money you borrow. The value of your chosen car is split into equal monthly payments with interest till the end of your chosen term. It can help to reduce your loan amount or the loan term to help cut the cost of your finance deal. It can be tempting to choose a car over a longer term as it can reduce your monthly payments, but it can also mean you are paying more overall in interest and if interest rates are already higher, this isn’t the most cost-effective for your circumstances. If you’re unsure how much you could borrow for finance, you could calculate the cost of car finance before you apply to see if car finance could be beneficial to you.
Save for a car finance deposit
Having a deposit to put down at the start of your car finance agreement can help to make your finance more affordable. By putting more down, you are reducing the loan term and how much you need to borrow. This can be attractive to lenders as the risk they take is lowered thanks to a smaller loan amount. A larger deposit can also help to reduce interest rates offered too.
Take your time
When it comes to getting the lowest car finance interest rate for your circumstance, it can take time. You shouldn’t rush into the first car finance deal you are offered. It can also be worth using a car finance broker who has access to multiple car finance lenders at once. Instead of applying with all finance lenders, you can apply once with a broker, and they help you select the best car finance deal from a range of trusted lenders. This can help save time and money and also be good if you’re struggling to get approved due to bad credit.