What do higher UK interest rates mean for car finance customers?
In 2022, the Bank of England has increased the official base rate for borrowing a number of times. Higher interest rates make the cost of borrowing more expensive for UK car finance consumers and are used to help slow spending and eventually interest rates will start to fall. However, if you’re looking to get a car on finance or already have one, you may be wondering how higher interest rates affect you. The guide below looks at how you may be affected by higher interest rates and how to help lower your interest rate offered.
Finding a car on finance
When you’re looking to get a car on finance, the Bank of England’s base rate will directly affect your car finance interest rates. It can be hard to find a car finance deal that offers 0% interest rate, but they could be found on some new cars. It can be possible to get 0% interest rate car finance but they are usually offered on high value cars and sometimes they aren’t as cost effective as the cars purchase price is much higher anyway. For many people a car is their lifeline, and they can’t afford to go without a car until the interest rates come down. So, it’s worth shopping around for the best deals before you commit to the first one that you come across.
Refinancing your current car
Refinancing your car is when you replace your current deal with a new one, usually with better terms and a lower interest rate. However, if you’re halfway through your agreement and in a good position to refinance your deal, you may not get a better deal if the interest rate has increased since you first took out your deal.
Already have a car on finance
If you already had a car on finance when the interest rate went up in the UK, your car finance deal shouldn’t change. Most car finance agreements in the UK use a fixed rate of interest which means it will stay at the same rate for the course of your agreement. This means that when the UK’s interest rate rises, it will not affect your current car finance deal.
How to help get a better car finance interest rate:
Whilst car finance interest rates can be determined by the bank of England’s base rate, there are also a number of factors that can affect your interest rate offered. Your personal circumstances such as your credit score, your down payment, and the amount you want to borrow can all affect your interest rate that is offered by lenders.
1. Work on your credit score
There are so many benefits to having a good credit score and it’s the same when it comes to car finance. A good credit score can see easier car finance approvals and also help save you money on your finance deal. Lenders usually reserves the best interest rates for those with better scores as they are less of a risk. A bad score usually implies that you’ve missed payments in the past or have struggled to keep up with paying your finance or credit back. If your score is a little on the low side, it can be worth taking some time to increase your credit score to help prove your creditworthiness and lower your interest rate offered.
2. Deposit contribution
Whilst there’s nothing wrong with no deposit car finance deals, but it can be more beneficial to consider having a deposit to put down at the start of your deal. Putting more in at the start of your deal means you are offsetting some of the cost of your finance. A larger deposit contribution helps to reduce the overall loan amount, make your finance payments smaller and also help lower your interest rate.
3. Length of loan term
It can seem attractive to take your car finance deal over the longest possible term and by financing your car for a longer period, you are spreading the payments further and reducing how much you need to pay each month. If you want the lowest possible monthly payments this may be the only way you can get a car. However, it can be worth comparing different loan terms to see what you could afford. Its best to choose the shorted loan term possible as you pay more in interest when you choose to finance your car over a longer period.