What’s the average APR for a car loan?

Cost is one of the biggest considerations when it comes to car finance. The rate of interest – also known as the APR – you’re offered can impact how much you need to spend each month, each year, and over the full term of your loan.
 
That’s why, generally speaking, the lower the APR of your car loan, the better.
 
When it comes to comparing average interest rates, it’s important to note that APRs aren’t one-size-fits-all. A whole host of factors – both within and outside of your control – can influence the rate you’re offered.
 
Finding a rate that fits your financial circumstances, needs, and budget should be prioritised over an APR that looks good on paper but doesn’t work for your real life.

Got a specific question? Why not jump to:

• How are APRs calculated?
• Why do APRs matter?
• What’s a good APR on a car loan?
• What are the different APR bands?
• What factors can affect an APR?
• How can I reduce the APR on my car loan?

How are APRs calculated?

While different lenders may consider different factors when calculating their APRs (and they keep these a closely guarded secret), there are a few common things that they’re likely to take into account:

The Bank of England base rate

The Bank of England’s base rate of interest is the amount they charge other banks and finance providers to borrow money. The more money it costs lenders to borrow, the higher the interest rate they’ll offer to their customers in turn.

The UK economy

The state of the wider economy and Bank of England base rate are closely linked. If there are fears that the UK may be entering a period of recession or inflation is extremely high, the Bank of England base rate will likely increase. Lenders may also be more reluctant to offer low APRs, just in case their existing customers start finding it harder to manage their debts and are at risk of defaulting on their loans.

Your credit score and payment history

Your credit score is a three-digit number, calculated by the UK’s three credit reference agencies (Equifax, Experian, and TransUnion), which lenders use to judge how likely it is that you’ll repay the loan. If you’ve missed payments in the past or had debt management issues, this can negatively impact your credit score. A good rule of thumb is that the better your credit score, the lower the APR you’ll be offered.

Term length and deposit

By putting down more money upfront or committing to a shorter repayment term, you can save money in the long run thanks to a potentially lower APR. As you are borrowing less money and repaying over a shorter period this will reduce the risk shouldered by lenders and provide a confident sign that you can comfortably afford this loan. This might mean higher initial costs or larger monthly payments, but the overall interest you pay will be reduced.

Why do APRs matter?

APRs are more than just an acronym. They exist to provide transparency, help you understand the cost of your car finance, and make it easy to compare loan options. Typically, you’ll want to choose the loan with the lowest APR available to you as it’ll be the cheapest option for borrowing money.
 
Not only does an APR tell you how much the overall loan cost will be, but it will also determine how much you need to pay each month.
 
Without an APR, you may struggle to estimate the total cost of car ownership or work out your budget. Securing a low or high APR could be the difference between making a car affordable or a stretch too far.

What’s a good APR on a car loan?

There’s no set APR figure that makes a car loan good or bad.
 
The APR that’s best for you will depend on your personal financial circumstances and how much you can afford.
 
It’s all relative. For example, someone with an excellent credit score may consider an APR of 17% to be bad, but this might be the best available offer for someone who has an inconsistent payment history and a credit score that could do with some work.
 
APR isn’t the only thing to consider when deciding which car finance loan to take. The loan term, monthly payment amount, and terms and conditions (e.g., any annual mileage restrictions) should all ideally fit with your priorities, driving habits, and budget.

What are the different APR bands?

While the exact APR you’re offered will depend on your individual financial situation, APR bands can help you estimate what your interest rate will be based on your credit score.
 
There are four main credit score bands: bad, fair, good, and excellent.
 
At Carmoola, someone with an ‘excellent’ credit score could qualify for the lowest APR band. Our loan rates currently start at 6.9% APR.
 
In contrast, someone with a ‘bad’ credit score may be grouped in the highest APR band and be offered a loan rate of 24.9% APR.

What factors can affect an APR?

While the wider UK economy and Bank of England base rate can also affect the interest rates available on the market, risk is one of the biggest factors that affects an individual APR.
 
Car finance lenders want to be reassured that you’ll pay back the money they lend you in full and on time. That’s why credit scores and credit reports are so important as they contain information on how you’ve acted as a borrower in the past. This is known as your “creditworthiness”.
 
While your credit score is one of the most important factors that affects the APR you’re offered, it’s not the only thing that lenders consider:

The type of car finance

An unsecured loan – like a personal car loan – can represent more risk to the lender and come with a higher APR (as the loan amount isn’t secured against an asset, such as a car) than a secured car finance loan like Hire Purchase (HP).

The car you want to buy

A brand-new car can have more finance options with a lower APR (some even as low as 0%) than a used car.

The loan term length

Car finance loans can last anywhere from one year to six, but you might find that the longer the loan term, the higher the APR.

The amount you borrow

A smaller loan amount is likely to be perceived as less risky than a large loan and may come with a lower APR that reflects this.

How can I reduce the APR on my car loan?

Everyone loves a good deal, so why wouldn’t you want to reduce the APR on your car loan? Here are our top tips for saving some pennies in the short and long term:

In the short-term

If you need to buy your next car straight away, that doesn’t mean you have to agree to the first loan you’re offered. Shopping around and using an online car finance broker to compare quotes can help you weigh up the different options available and ensure you get the best deal for you.
 
To shop around without negatively impacting your credit score, check that the lender or broker you’re using will only run a soft credit search to provide your quote. This type of credit check isn’t visible to other lenders and shouldn’t affect your score. It’s only if you choose to proceed with an option and find out your exact APR that a hard credit check will take place.

In the long-term

No rush? In that case, you can start taking steps to improve your credit score over time. While it’s not the only factor that affects your APR, it is important.
 
No matter how you’ve managed your money in the past, you can take action to help improve your score.
 
It’s not an exact science but your credit score might rise if you:

• Make your existing loan payments on time
• Keep your total credit utilisation percentage low
• Limit the number of hard searches in a short time
• Register on the electoral roll
• Check the other person’s credit score before entering a joint contract and becoming financially linked

Already have a loan with a high APR? No problem! If you can improve your credit score during your loan term, you might qualify to refinance during your existing term and switch to a new finance agreement with a lower APR.