We are all naturally pulled towards the lowest APR when looking for car finance. However, it is essential to look at other issues such as the initial deposit, additional costs, final payment and ownership of the vehicle. There is a considerable degree of flexibility in the car finance market, and it is essential to know what you are signing up for.
Personal loans
As with any finance, you need an excellent credit history to obtain the best rates available. In the current low-interest-rate environment, it is possible to secure personal loans as low as 2.8%. However, many people will be looking towards high single-digit rates or even double-digit rates. This is because most personal loans are unsecured, which means there is no collateral involved.
Cash loans are helpful because, as a cash buyer, you may be able to negotiate a discount or an array of additional extras such as free services for one or two years. You will also own the vehicle as soon as you make the payment.
The following examples assume that the rate is fixed for five years, after which the loan will be repaid in full.
| APR | 1.2 SE Edition 5dr Vauxhall Corsa (RRP £15,998) | A180d Sport executive 4dr Auto Mercedes-Benz A-Class (RRP £32,810) | Tesla Model 3 All Electric Sedan (RRP £44,490) |
| 3% | £287 per month/
£17,230 in total |
£588 per month/
£35,337 in total |
£798 per month/
£47,917 in total |
| 5% | £301 per month/
£18,065 in total |
£617 per month/
£37,049 in total |
£837 per month/
£50,239 in total |
| 10% | £336 per month/
£20,191 in total |
£690 per month/
£41,410 in total |
£935 per month/
£56,152 in total |
| 15% | £372 per month/
£22,363 in total |
£764 per month/
£45,864 in total |
£1036 per month/
£62,192 in total |
The above figures give you an idea of the monthly repayments and total repayments for various vehicles.
Car dealership finance
Once you step into a car dealership, it can be easy to have your head turned by vehicles that you may not be able to afford. Consequently, many car dealerships will often offer their own finance deals through third-party finance companies. You will find that the finance rate offered for new vehicles tends to be less than that for used cars. While not set in stone, the APR on a used vehicle is generally around five percentage points higher than that for a new car.
The traditional range for new vehicles is from 0% upwards and between 5% and 20% for used cars. Again, the rate that you are offered will depend upon your credit rating and, ultimately, whether you can afford the vehicle. It is important to note that the finance company will own the car until you make the final payment.
0% APR deals
We move on to the “very attractive” 0% APR deals that many car dealerships offer with the purchase of new vehicles. Traditionally, you would stagger your payments over five years. The dealership will transfer the car into your name at the end of the term. It is not your vehicle until you have paid the final instalment!
As you might have guessed, it is not as straightforward as it seems, and there are many factors to consider with 0% APR deals.
Are you eligible?
If you have a chequered credit history, you would be unlikely to be offered a 0% APR deal. However, in reality, the deal you get would still likely be desirable. After all, the value of new vehicles will diminish somewhat when newer models come out. So, it is in the best interest of the car dealership to sell their cars as quickly as possible on the best terms.
Deposit
Even if you are eligible for a 0% APR deal, it is vital to be aware of the level of deposit required. The car dealership would likely require a significant deposit, upwards of 10% of the sale price, even for those with a perfect credit score.
New car models on the way?
You tend to find that many car dealerships will offer 0% finance on new cars just before the latest models arrive on the forecourt. Alternatively, they may look to offer attractive finance rates on vehicles they are having trouble selling for whatever reason. So if a deal seems too good to be true, it may well be; check out the details!
Consider cash purchase terms
If the car dealership is offering you a 0% APR deal, it is unlikely they would agree to any significant discount on the sale price. However, if you are paying in cash, you could conceivably negotiate a double-digit percentage discount. As a cash buyer, don’t divulge this until the last minute after the salesperson has made their “best offer” pitch. On occasion, you may be able to negotiate a discount that is on par or more than the cost of third-party finance. If you don’t ask, you won’t get it!
PCP deals
Personal Contract Purchase (PCP) deals have grown in popularity. In summary, you pay a deposit on a vehicle and then monthly payments for three years, at which point you have a decision to make. After that, you can make an additional one-off payment and take ownership of the vehicle, swap it for another PCP funded vehicle or sell it back to the dealership. When you sign a PCP deal, you will be given a “guaranteed value” for the car at the end of the PCP arrangement.
While PCP is a form of finance, you are really paying for the vehicle’s expected depreciation over the term. It is essential to realize that you do not own the car and will only do so if you decide to buy it by making the additional one-off payment. The terms for PCP finance will vary depending on your credit score:
- Excellent credit score, the rate will vary between 6% and 11%
- Good credit score, the rate will range between 12% and 19%
- Poor credit score, you may pay upwards of 20%
When looking at PCP arrangements, it is essential to be aware of:
- Initial deposit
- Monthly repayments
- Expected depreciation
- Guaranteed value
- Balloon payment required to purchase the vehicle outright
Varied interest rates
As you will see from the above examples, in theory, you could secure anything from 0% APR to above 20% when buying a car. If you use finance to acquire a vehicle, it is no different to a personal loan, where your credit score dictates the rate. You may also be able to negotiate improved rates if you can put down a relatively large deposit on the vehicle.
It is advisable to negotiate when looking to acquire a new or used vehicle. Cash buyers tend to be in a relatively strong position, but don’t show your hand until the last minute!