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Buying a car can be one of the biggest financial decisions you make in life. Many car finance agreements require you to make monthly repayments with added interest and are usually spread over a number of years. There are a number of ways in which you can help to reduce your interest rate when applying for a car loan.
What is an interest rate?
When you apply for car finance, you will be offered a monthly payment which includes an interest rate. An interest rate is the amount you will pay each year to borrow and is expressed by a percentage rate. It is a percentage of the total amount of the car loan that you apply for. There are a number of factors that affect your interest rate offered and paying a higher interest rate can increase how much you pay overall.
Put down a deposit
Car loan agreements such as Hire Purchase ask for a deposit at the start of the agreement. This is usually round 10% of the car you are purchasing. Having a deposit to put in can help to reduce your monthly repayments and your interest rate offered. If you are struggling to get approved, it can also increase your likelihood of getting a loan. A deposit can reduce the amount of interest you pay because you don’t need to borrow as much from the lender. It can help to make your payments more manageable and reduce how much you pay overall.
Increase your credit score
Interest rate on car loans can also be about risk to the lender. If you have a low credit score or missed payments in the past, lenders see you as more of a risk to not pay back a loan. Lenders charge higher interest rates to people who they think are more likely to default on their loan. You could spend some time increasing your credit score in the run up to your car loan application.
Shop around
Your interest rate offered can differ depending on which lender you use. You can get an idea of your interest rate by getting pre-approved by using soft search credit checks. You should try to use soft searches only as multiple hard searches on your credit file can harm your credit score. If you’ve already found the car you want at a dealer, you could also consider using a car finance broker. They compare a range of lenders and finance packages on your behalf and then you can get the car you want from any reputable dealer!
Ask someone to guarantee your loan
If your credit is low and you’ve been offered a high interest rate, you could help to reduce it by asking someone else to guarantee your loan. A guarantor or co-signer is when someone you know, either a friend or family member agrees to meet the repayments if you fail to do so. However, if you fail to meet the repayment schedule repeatedly, both of your credit files can be negatively affected.
Reduce your term
When you take out car finance, you will usually have an idea in mind of what budget you can afford. But the term you choose for your loan can affect your monthly repayments and interest rate. Car loans are usually paid off between 1-5 years and the average being around 3-4 years. A shorter repayment term can mean higher monthly payments, but it can help to reduce the interest rate offered and how much interest you would pay overall. You should always choose a term which is affordable for your circumstances and never borrow more than you can afford to pay back. Lenders will usually also request bank statements to perform an affordability check before accepting someone for finance.