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What's the Average APR for a Car Loan?
At the time of writing at the end of 2024, the average APR for a car loan is around 7% to 9%.
However, working out the exact average APR for a car loan is impossible - there are just too many factors at play to make it meaningful. Even if we did pull an average out of the hat (which, to be fair, we just did), it’s not going to really tell you the APR that you are going to get.
A far more important thing to understand is what affects APR, and what you can do to lower it.
And to get an independent comparison on the best rate you could achieve for your car purchase:
Current UK Trends with Car Finance APRs in 2024
Impossible to calculate, for sure, but not impossible to estimate. By taking a look at some of the current trends in APRs, we can provide some idea:
Low APRs
The current bank of England base rate is 4.75%, so anything lower than that is impossible. However, we’re seeing some APRs as low as 5% to 7% for borrowers with extremely good credit ratings who are looking at new cars. This increases to between 6.5% and 9% for the same borrowers when considering used cars.
Moderate APRs
The middle range, by far the most frequent APRs on car loans, settles between 7% and 11% for new cars, rising to 9% to 14% on older vehicles.
High APRs
Here the result of having subprime credit scores begins to really show. A drop in credit rating sees APRs rise significantly, with rates climbing to 15% on new cars and to 20% or higher on used cars.
Extremely High APRs
The sky is the limit, with some APRs reaching 40% and above when credit rating drops significantly. These do still provide an opportunity for those with bad credit ratings to take out car finance, the risk mitigated by the use of the car as security for the finance, but we would normally advise delaying car finance here until you’ve had a chance to improve your credit score.
What is APR Anyway?
APR is the level of interest (and other fees) that make up the additional costs of car finance. It’s the cost to you of borrowing the money.
Looked at from the other perspective, it’s the gross profit that the finance company make on the loan.
Let’s face it - no one does something for nothing and, somewhat unsurprisingly, that’s true of banks and other financial institutions. They’re more than happy to lend you money just as long as you give something back. APR is a way of understanding what that is.
While we look at APR as a yearly number, because that’s easiest to do, it’s often calculated monthly.
This is good for you as once you’ve made that first monthly payment, there’s less left on the balance of the loan and the interest drops accordingly. That’s why we just said that the first year isn’t really £1,000 in interest.
Why is There No Average APR for Car Loans?
Let’s look at what goes into calculating the APR for your car loan. It’s not a small list!
The Bank of England Base Rate
This rate, set by the Bank of England, represents the level of interest added when banks lend money to each other. There are very few situations when a bank will lend you money at less than the base rate because, in real terms, they’re losing money if they do. At the time of writing the Bank of England base rate is 4.75% - that means the very, very lowest APR you’re likely to see is 5%.
Your Credit Score
Your credit score (also called credit rating or credit history) is the primary way for a lender to determine how much risk you pose as a borrower. APR is heavily affected by risk, as the riskier you are, the more reward the lender wants for providing the funds. In this case, a good credit score leads to good APRs and a poor one means APRs rise.
Affordability
A second risk assessment factor alongside your credit score, your affordability (sometimes referred to as your debt-to-income ratio) represents how easily you will be able to make your payment obligations. Like credit score, it has a significant effect on APR.
Deposit
The deposit, also called the initial, upfront,or down payment is a larger sum that you pay at the beginning of the contract to lower the level of finance on the deal. Some deals require a deposit while others are optional, but the greater a deposit you offer, the better rate of APR you will achieve.
Vehicle Type and Age
Cars with higher and easily achieved resale values will result in lower APRs. Again, this is because they represent less risk for the lender. So, a brand new car with a good resale value is going to offer a lower APR than trying to get car finance for a used car that’s seen better days.
Length of Loan
Shorter loan terms can lead to lower APRs. While this isn’t as much a factor as others, a shorter loan does mean less lender risk.
Type of Finance
With different structures, slightly different risk assessments, and a range of terms, the type of car finance is another key factor. Hire purchase (HP) tends to have a higher APR than PCP (personal contract purchase).
PCH (personal contract hire) doesn’t actually have an APR in the same way as the other finance terms as it is structured differently, but is still similarly affected by credit score and other influences.
Lender Type
Different lenders, such as banks, dealership finance, specialist car finance providers etc., will all have different rates.
7 Tips to Get the Best Car Loan APR
Taking into consideration the factors that contribute to the APR, here are 7 tips to help you get the best car loan APR:
Work on your credit score
Possibly the greatest factor, it’s key to have a decent credit rating. A little patience and sensible financial management for three months can make all the difference - and while three months feels like a long time at the start, it passes quickly.
Reduce your outgoings if you can (drop Netflix for a bit!) and make sure you pay those direct debits every time without fail. Lowering your debt liabilities is also a strong move.
Ask someone to sign with you
A co-signed agreement is one where a second person agrees to act as a guarantee. If you know someone, normally a family member, with a far stronger credit rating, it’s work asking if they’d be willing to help and could save considerably on the interest.
Use a larger deposit
If you have any savings, it may be worth putting some of them towards the new car. Remember also, that you can part exchange your existing car as part of your upfront payment.
Reduce the loan length
With hire purchase agreements, shortening the loan terms can help. By switching from a 60 month (5 year) agreement to a 36 month (3 year) one, you may find the APR improves.
And watch out for low monthly payments! It may sound counter-intuitive, but you don’t always want the lowest monthly payment if you want to save money overall. Many dealers will encourage you to take a longer term to lower the monthly payments, but in doing so the agreement will generate more interest even if the APR is the same (and it probably won’t be).
Choose a different car
A better car value will lower the APR and mean you have a better car. Many people lean towards a cheaper car thinking it’ll save them money when the opposite is often true.
Get a pre-approval
With many lenders you can ask to have your loan pre-approved before making a final application. This will tell you an APR estimate that’s close to a real value without affecting your credit rating.
Get help
Speak to Clifton Private Finance. We will answer your questions regarding the factors that affect APR as well as helping you get the perfect car loan.
Apply with Clifton Private Finance
Once you appreciate that car finance APR is based on so many factors, including your personal details and choices, it's easy to see that asking the average APR for car loans is a pointless question. But armed with all the information in this article, you will be able to work on getting the best APR possible.
If you’re looking to get car finance, look no further. At Clifton Private Finance we can arrange a car loan that is as personalised for your needs as the APR that comes with it! Contact us today to speak to an expert.
