What is APR on car finance? A plain English explanation

What is APR and why does it matter when getting a car on finance? Find out in our car finance guide.



APR is one of those things that everyone's heard of but not everyone understands. You might have come across it when looking at a mortgage, a personal loan or car finance.

In all cases, it stands for "annual percentage rate". It refers to the yearly rate that represents the cost of borrowing. This includes interest and finance charges.

Let's say you buy a car on finance with an APR of 10%. That doesn't mean you'll simply pay an extra 10% of the car's price each year.

Instead, APR lets you compare the annual cost of borrowing money. It takes into account the interest rate and certain fees or charges associated with the finance.

The total amount you actually repay will also depend on factors such as:

• How much you borrow
• The deposit you put down
• How long you borrow the money for
• The interest and any other charges
  
  

APRs are useful figures when comparing car finance deals. You get to compare a clear percentage as well as the monthly payment.

Before we go any further, it's worth pointing out that lower monthly payments don't necessarily mean a cheaper deal. That's because a longer borrowing term can cost more overall but less per month.

What is APR (in plain English)?

APR is the total yearly cost of borrowing money, given as a percentage.

In car finance, it applies to the interest and certain fees or charges associated with your finance. Along with the amount you borrow and the length of your agreement, these costs help determine how much you'll repay.

Interest rates and APR are connected, but they're not quite the same. The interest rate tells you how much you're charged for borrowing the money. APR is a broader measure of the annual cost of the finance, taking into account the interest rate and certain compulsory fees and charges.

For example, a finance agreement might have an interest rate of 8% but an APR of 9.5% once relevant charges are taken into account.

When comparing car finance deals, your best bet is to compare APRs and the total cost rather than just looking at monthly repayments.



What's the difference between representative APR and personal APR?

Representative APR is what lenders advertise as their usual APR. It's an example, not the figure you'll necessarily pay.

In the UK, at least 51% of successful applications have to be offered the representative APR. There's no guarantee, however, that you'll pay that percentage.

Instead, you may have to pay the APR you personally qualify for. This is the APR you are offered – not the one that's advertised.

This will be based on your financial circumstances and the finance agreement in question.

The important thing to remember is that when you're deciding whether to accept a finance agreement, it's your actual APR that matters. This is the APR you're personally offered based on your application and circumstances – not the representative APR you've seen advertised, which isn't necessarily the rate you'll receive.

What affects your personal APR?

When you apply for car finance (hard search) or check your eligibility (soft search), you'll find out your personal APR. This is the APR you personally qualify for – not the representative APR.

Your personal APR is affected by a few factors. One of the biggest factors is your credit score. If your credit score is good, you're likely to access better rates.

The deposit you put down can have an impact, too. The higher the upfront payment, the less risk the car finance provider is taking on. Like a positive credit score, this can help you unlock lower APRs.

Most of the time, interest goes up with the length of the borrowing term. So, if you want to reduce your personal APR and you can afford it, it can pay to ask for a shorter term.

Last but not least, the vehicle you're buying can affect your personal APR. The older the car, the higher the interest and finance charges tend to be.



How can I improve my personal APR?

There are several ways you can improve your personal APR. These overlap with the ways you can increase your chances of getting approved for car finance in the first place.

1. Improve your credit score

The single best thing you can do is boost your credit score. You can do this by paying all your bills and debts on time and registering on the electoral roll. It can also help to use less credit and make sure your credit report is error-free.

It's worth pointing out, however, that you can use a bad credit car finance specialist like us. We can put you in touch with lenders who look at what you can actually afford, not just your financial past.

2. Increase your deposit

The next most significant thing you can do to improve your personal APR is to increase your deposit. Lenders want security. So, the more money you give them upfront, the less risky you appear.

3. Choose a shorter repayment term

You can also consider choosing a shorter repayment term. The shorter the term, the less risk there is of you defaulting – something that lenders like to see.

4. Compare your options

It works in your favour to compare different lenders rather than plumping for the first offer you see. If you do shop around, make sure to use soft credit searches to check eligibility. If you apply directly, it could affect your credit score.

And remember that a car finance broker like us can help. We'll check your eligibility with specialist lenders so you don't have to.

How we can help

At Zoomo, our representative APR is 13.9%. We offer a wide range of cars on finance in hire purchase (HP) and personal contract purchase (PCP) agreements. And because we specialise in borrowers with adverse credit, your credit score shouldn't be a barrier to getting the car you need.



So, if you need bad credit car finance in Newcastle, why not apply online today? It only takes two minutes, and it won't affect your credit score at this stage.