What is APR?

Borrowing money for a car isn’t free. The APR figure listed on a car finance deal gives you an idea of how much it’ll cost.

If you’re looking to buy a car on finance, you’ll keep seeing the term APR. It stands for Annual Percentage Rate, and is a crucial bit of information to understand how much you’ll pay for your vehicle over the course of a finance contract.

The higher the APR, the more money you’ll pay overall. All car finance quotes – PCP or hire purchase – will include an APR figure, and it’s calculated using a standard method meaning it’s a great way to compare different quotes.

APR figures are only quotes on finance deals, not leasing – those work in a different way, with no option to buy the car and therefore no interest.

One major thing to remember when comparing APR figures is that any deposit contribution discounts from the dealer or manufacturer aren’t taken into account. That means that if you find a deal that features a deposit contribution, the APR figure shown will be higher than the real premium that you’ll pay to finance the car.

The discount lowers the interest charged – an identical deal that doesn’t feature a deposit contribution may show the same APR, but would cost you far more in total. That means that the best way to compare overall costs is to get like-for-like quotes from different models with the same type of finance, the same deposit, the same mileage allowance and the same contract length.

All PCP and HP deals should include the total amount payable, enabling you to accurately compare deals, although this doesn’t usually take into account any deposit contributions.

How can I get the lowest APR for car finance?

The most important factor in getting low APR is your credit score. This represents your perceived risk to lenders – the higher your credit score, the more confident they can be that you’ll repay when you’ve borrowed, and that usually means they’ll offer you a lower APR.

If your credit score isn’t great, lower APR rates and 0% APR deals will be very difficult, if not impossible to get. That said, 0% APR deals aren’t always the best value deals, as those with higher APR but a deposit contribution could cost you less overall. Offering to increase your own deposit can also decrease the APR available, because you’re borrowing less money, which means less risk to the finance company.

What is 0% APR?

A 0% APR deal means there’s no interest on the deal, and no extra fees – you only repay the amount that you borrow. On the face of it, that means there’s no penalty in taking out finance compared to buying the car outright.

However, 0% APR deals aren’t always the bargain that they may appear to be. Some deals aren’t available in conjunction with other discounts, such as cash price discounts or deposit contribution incentives, so it could be that the overall cost is actually higher than with other deals. As with any type of car finance, it’s important to check the fine print and compare quotes to see which offer the best overall deal.

APR on new car finance deals

Car manufacturers often offer very attractive, low-interest deals on new cars – even 0% APR. However, that’s offset against the high purchase price of a brand-new car.

Even with a low APR, a brand new car could cost you substantially more per month than an identical, nearly new model with a higher APR charge.

And, as with 0% APR deals, low-interest offers may not be available with other discounts. As always, it’s worth getting like-for-like finance quotes to work out which offer gives you the best deal.

APR on used car finance deals

It’s highly unusual to find 0% APR deals on a used car, as those discounts are generally restricted to brand new models. If you do happen to find one, the chances are that the cash price has been hiked by the dealer or finance company to compensate for the lost interest.

That said, competitive rates are still available. When comparing deals, make sure you compare the APR rather than the advertised ‘interest rate’, as the latter doesn’t include the various charges you may face when taking out a finance agreement. APR will be more realistic when it comes to overall cost.