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Car finance ›
How is car finance interest calculated?
Updated: Thursday, 14 March 2024
When you’re looking for a new car and weighing up your options regarding finance and car loans, it’s essential to understand how your interest rate affects the monthly payments you’ll make.
In this guide, we explain how interest rates are calculated and the difference between interest and the annual percentage rate (APR), so you understand how your monthly payments are calculated.
What is car finance interest?
Car finance interest is the extra amount of money you’ll pay to a lender to borrow money for a car. In return for lending money, your finance company or bank will charge an interest rate, which is a percentage of the amount borrowed.
This interest rate is the cost of borrowing money. It is typically expressed as an annual percentage rate (APR).
Generally, people with good or excellent credit scores will be offered lower interest rates because lenders consider them to be a lower risk.
Lower interest rates mean you’ll pay less money overall, while higher rates will generally increase the total cost of your new car. That’s why it’s important to understand whether you have good or bad credit.
For more information, check out our guide that explores what a good credit score is.
How is car finance interest calculated?
Let’s say you borrow £10,000 from us to buy a car and your APR is 21.5%. You have ‘good’ credit and are looking to repay the finance over 55 months, making 54 monthly payments.
As you have borrowed £10,000.00 for the car, you will repay that with an additional £5,135.66 in interest.
The total you would repay is £15,135.66 which is broken down into monthly payments of £280.29.
Please note that this in an illustrative example. The amount of interest you are charged for car finance depends on lots of factors, including the price of the car, the type of finance you take out, your credit history, and your current financial situation. At Moneybarn, we offer APRs from 18.5% to 47.5%.
The interest rate you receive on car finance can vary based on several factors, including:
- Your credit score
- The amount you’re borrowing
- The length of your agreement
- Current market interest rates.
Most types of car finance (Conditional Sale and Personal Contract Purchase for example) have a fixed interest rate. This means your monthly payments will be the same throughout the duration of your agreement. This only changes if you make a partial early settlement (repaying some of your finance early) or incur additional fees or charges such as excessive mileage charges if those apply.
How do you get a lower car finance interest rate?
Everyone’s car finance agreement is different, as it depends on lots of factors including your personal circumstances. Having a lower interest rate means that finance will cost you less, so you might be wondering if there is anything you can do to get a lower interest rate.
Here are some things that may help you get approved for car finance:
1. Improve your credit score
Your credit score reflects your financial history. Having a higher credit score can demonstrate that you are responsible with credit, which makes you a lower risk to lend to. As a result, you may be offered a lower interest rate than someone who, for example, has had a CCJ or IVA in the past.
Our guide on improving your credit score walks you through the most common ways, but some of the most common things include:
- Paying your bills in full and on time
- Check your credit file and fix any errors if applicable
- Try to avoid using all of the credit available to you
- Make sure you know
2. Research lenders
There are lots of different car finance companies available. Even if you had a low credit score, there will be a lender out there that can help you. Different lenders have different criteria and offer different types of finance, so make sure you understand the ins and outs before you apply.
3. Negotiate the car’s price
A lower car price means you’ll pay less in interest, as you won’t be borrowing as much finance to cover your new car. Make sure you know what to check when buying a used car so you can negotiate with the dealer to get the best possible price.
4. Consider a larger deposit
A larger deposit reduces the amount you need to finance. It can help when getting a car that is slightly outside your affordability, as it helps to reduce the monthly payments. While it is possible to get car finance with no deposit, not putting down a deposit means you will pay back more in interest over the length of your agreement.
We’ve created a guide on car finance deposits to help you decide if putting down a larger deposit is the right option for you.
5. Consider a shorter agreement term
While longer agreements might seem appealing due to lower monthly payments, a longer agreement means you will pay more in interest compared to someone borrowing the same amount of money on a shorter agreement. Our guide to APRs explores this in more detail.
6. Read the terms and conditions
Make sure you fully understand the terms of the finance agreement before making any applications. Understand the interest rate, any fees involved, and what your options are throughout and at the end of the agreement.
We’ve written a guide to the different types of car finance available, including Conditional Sale which is what we offer.
7. Consider a specialist lender
If your credit is less-than-perfect, you might have been turned down by mainstream lenders. In that case, you might have to use a specialist lender like Moneybarn.
Tired of being rejected for car finance? We could help
We’re specialists in bad credit car finance, so if you have poor credit or have been refused car finance in the past, we could help.
We’re proud to have over 30 years of experience helping people onto a better road ahead. We could help, even if you’re self-employed looking to finance a car, or you’ve had a CCJ or IVA in the past.
See what your agreement could look like with our car finance calculator. Or if you’re ready, our online quote form takes less than 5 minutes and gives you an instant decision.
FAQs about car finance interest
What is the difference between interest and APR?
Interest refers to the money a lender charges you for credit. It’s usually expressed as a percentage of the principal amount, and is the cost you pay for borrowing money.
When you take out credit, you pay back the amount you borrowed as well as interest on that amount.
APR stands for Annual Percentage Rate, which is a measure of the cost of borrowing. APR includes the interest rate and any additional fees or charges associated with borrowing money. The APR gives you a more complete understanding of the total cost of finance, whereas the interest rate just tells you how much you’ll owe on top of the amount you borrowed.
With our vehicle finance, there are no extra costs other than APR during the lifetime of your agreement. If you are found in a situation where we have to terminate your agreement, then some charges may apply. However, we can’t speak for other lenders, as their terms and conditions will vary.
Why are some interest rates higher than others?
Interest rates will vary based on several factors, including:
- Your credit file: lenders assess your eligibility for credit by looking at your credit score and history. If you’ve missed payments in the past, or have a CCJ or IVA, you might be seen as higher risk by lenders, which can result in you being offered higher interest rates.
- The agreement length: the length of your agreement will affect the total amount of interest you pay. You could use our car finance calculator to see what your agreement might look like.
- The amount you borrow: the amount you borrow will also affect how much interest you pay over the course of the agreement. Borrowing more money means you will pay more in interest, compared to someone borrowing less.
When you’re looking for a new car and weighing up your options regarding finance and car loans, it’s essential to understand how your interest rate affects the monthly payments you’ll make.
In this guide, we explain how interest rates are calculated and the difference between interest and the annual percentage rate (APR), so you understand how your monthly payments are calculated.
What is car finance interest?
Car finance interest is the extra amount of money you’ll pay to a lender to borrow money for a car. In return for lending money, your finance company or bank will charge an interest rate, which is a percentage of the amount borrowed.
This interest rate is the cost of borrowing money. It is typically expressed as an annual percentage rate (APR).
Generally, people with good or excellent credit scores will be offered lower interest rates because lenders consider them to be a lower risk.
Lower interest rates mean you’ll pay less money overall, while higher rates will generally increase the total cost of your new car. That’s why it’s important to understand whether you have good or bad credit.
For more information, check out our guide that explores what a good credit score is.
How is car finance interest calculated?
Let’s say you borrow £10,000 from us to buy a car and your APR is 21.5%. You have ‘good’ credit and are looking to repay the finance over 55 months, making 54 monthly payments.
As you have borrowed £10,000.00 for the car, you will repay that with an additional £5,135.66 in interest.
The total you would repay is £15,135.66 which is broken down into monthly payments of £280.29.
Please note that this in an illustrative example. The amount of interest you are charged for car finance depends on lots of factors, including the price of the car, the type of finance you take out, your credit history, and your current financial situation. At Moneybarn, we offer APRs from 18.5% to 47.5%.
The interest rate you receive on car finance can vary based on several factors, including:
- Your credit score
- The amount you’re borrowing
- The length of your agreement
- Current market interest rates.
Most types of car finance (Conditional Sale and Personal Contract Purchase for example) have a fixed interest rate. This means your monthly payments will be the same throughout the duration of your agreement. This only changes if you make a partial early settlement (repaying some of your finance early) or incur additional fees or charges such as excessive mileage charges if those apply.
How do you get a lower car finance interest rate?
Everyone’s car finance agreement is different, as it depends on lots of factors including your personal circumstances. Having a lower interest rate means that finance will cost you less, so you might be wondering if there is anything you can do to get a lower interest rate.
Here are some things that may help you get approved for car finance:
1. Improve your credit score
Your credit score reflects your financial history. Having a higher credit score can demonstrate that you are responsible with credit, which makes you a lower risk to lend to. As a result, you may be offered a lower interest rate than someone who, for example, has had a CCJ or IVA in the past.
Our guide on improving your credit score walks you through the most common ways, but some of the most common things include:
- Paying your bills in full and on time
- Check your credit file and fix any errors if applicable
- Try to avoid using all of the credit available to you
- Make sure you know
2. Research lenders
There are lots of different car finance companies available. Even if you had a low credit score, there will be a lender out there that can help you. Different lenders have different criteria and offer different types of finance, so make sure you understand the ins and outs before you apply.
3. Negotiate the car’s price
A lower car price means you’ll pay less in interest, as you won’t be borrowing as much finance to cover your new car. Make sure you know what to check when buying a used car so you can negotiate with the dealer to get the best possible price.
4. Consider a larger deposit
A larger deposit reduces the amount you need to finance. It can help when getting a car that is slightly outside your affordability, as it helps to reduce the monthly payments. While it is possible to get car finance with no deposit, not putting down a deposit means you will pay back more in interest over the length of your agreement.
We’ve created a guide on car finance deposits to help you decide if putting down a larger deposit is the right option for you.
5. Consider a shorter agreement term
While longer agreements might seem appealing due to lower monthly payments, a longer agreement means you will pay more in interest compared to someone borrowing the same amount of money on a shorter agreement. Our guide to APRs explores this in more detail.
6. Read the terms and conditions
Make sure you fully understand the terms of the finance agreement before making any applications. Understand the interest rate, any fees involved, and what your options are throughout and at the end of the agreement.
We’ve written a guide to the different types of car finance available, including Conditional Sale which is what we offer.
7. Consider a specialist lender
If your credit is less-than-perfect, you might have been turned down by mainstream lenders. In that case, you might have to use a specialist lender like Moneybarn.
Tired of being rejected for car finance? We could help
We’re specialists in bad credit car finance, so if you have poor credit or have been refused car finance in the past, we could help.
We’re proud to have over 30 years of experience helping people onto a better road ahead. We could help, even if you’re self-employed looking to finance a car, or you’ve had a CCJ or IVA in the past.
See what your agreement could look like with our car finance calculator. Or if you’re ready, our online quote form takes less than 5 minutes and gives you an instant decision.
FAQs about car finance interest
What is the difference between interest and APR?
Interest refers to the money a lender charges you for credit. It’s usually expressed as a percentage of the principal amount, and is the cost you pay for borrowing money.
When you take out credit, you pay back the amount you borrowed as well as interest on that amount.
APR stands for Annual Percentage Rate, which is a measure of the cost of borrowing. APR includes the interest rate and any additional fees or charges associated with borrowing money. The APR gives you a more complete understanding of the total cost of finance, whereas the interest rate just tells you how much you’ll owe on top of the amount you borrowed.
With our vehicle finance, there are no extra costs other than APR during the lifetime of your agreement. If you are found in a situation where we have to terminate your agreement, then some charges may apply. However, we can’t speak for other lenders, as their terms and conditions will vary.
Why are some interest rates higher than others?
Interest rates will vary based on several factors, including:
- Your credit file: lenders assess your eligibility for credit by looking at your credit score and history. If you’ve missed payments in the past, or have a CCJ or IVA, you might be seen as higher risk by lenders, which can result in you being offered higher interest rates.
- The agreement length: the length of your agreement will affect the total amount of interest you pay. You could use our car finance calculator to see what your agreement might look like.
- The amount you borrow: the amount you borrow will also affect how much interest you pay over the course of the agreement. Borrowing more money means you will pay more in interest, compared to someone borrowing less.
For a better road ahead
Moneybarn is a member of the Finance and Leasing Association, the official trade organisation of the motor finance industry. The FLA promotes best practice in the motor finance industry for lending and leasing to consumers and businesses.
Moneybarn is the trading style of Moneybarn No. 1 Limited, a company registered in England and Wales with company number 04496573, and Moneybarn Limited, a company registered in England and Wales with company number 02766324. The registered address for these companies is: Athena House, Bedford Road, Petersfield, Hampshire, GU32 3LJ.
Moneybarn’s VAT registration number is 180 5559 52.
Moneybarn Limited is authorised and regulated by the Financial Conduct Authority (Financial Services reference No. 702781)
Moneybarn No. 1 Limited is authorised and regulated by the Financial Conduct Authority (Financial Services reference No. 702780)
