If you’re looking to get a car on finance, you may be wondering how much it costs. There are a number of factors which can affect your car finance payments and can include things such as your credit history, deposit contribution, type of car you want and also how long you want to spread the loan over. One of the biggest factors which can affect your payments is your interest rate offered. Whether you’re currently in a car finance agreement or looking to get approved for car finance, there are a number of ways in which you can help to reduce your interest rate.
What is a car finance interest rate?
Your car finance interest rate is similar to your home loan interest rate can determine how much extra you will pay when getting a car. A finance lender adds interest to loans or finance to make money and also secure the deal. Interest rates can vary from person to person and can seriously affect how much you need to pay back. You borrow an amount from the lender to buy a car and interest is added on top to get the total amount you will pay back. This amount is then divided into how much you will pay each month. Interest rate is usually confused with APR; however, interest rate is the cost of borrowing, and the APR is the cost of borrowing plus any additional fees.
Let’s take a look at how you can reduce your car finance interest rate below.
Put down a deposit
The interest rate offered can be determined by how much you want to borrow. An easy way of reducing your amount borrowed is to put more down in the form of a deposit. Paying a larger deposit can help you secure finance as you don’t have to borrow as much from the lender and it can be easier to pay off your loan each month. The lower the interest rate is, the less you will end up paying back overall.
Increase your credit score
Car finance lenders will usually check your credit score before they accept you for finance. Credit scores and interest rates are all about risk to the lender. If you are looking or bad credit car finance, you may receive a higher interest rate offer. This is because if you have a low credit score due to missed payments in the past, it poses more of a risk to the lender. In general, those with higher credit scores can benefit from lower interest rates. There are a number of ways in which you can start to build your credit score and can include reducing your current debt, paying your bills on time and in full, uses credit little and often, and keeping your credit utilisation low.
Choosing a shorter loan term
It can be tempting to take the longest term possible to pay for your car. A longer term tends to lower your monthly payments, but it can mean you pay more in interest. Shorter loan terms can mean higher payments, but it could save you money in the long run. Choosing a term that’s right for you can depend on a couple of factors. You should make sure the term you choose is the lowest possible with monthly repayments that are realistic and affordable. With any form of finance or loan, it’s crucial that you can afford to pay back your loan on time and in full. Some finance agreements now last as long as 60 months so you should consider if you will be able to meet the repayments for a number of years.
Refinance your current loan
If you currently have a car on finance and you want to reduce your current interest rate you could consider refinance a car loan. Refinancing is when you replace your current finance agreement with a new loan. Usually, your new loan has better terms and lower monthly payments. Or if you are struggling to meet your repayments, some people use refinancing to lengthen their term length to make it more affordable. It is recommended that you wait until at least halfway through your current finance agreement before you refinance.
