The level of interest rate that car finance is borrowed at is often worked out at a flat rate. The flat rate is different though to the common percentage understanding of finance which is worked out by an annual percentage rate (APR).
The level of APR will be determined by a number of different factors which include the lenders terms, the borrower’s credit rating, the types and cost of any acceptance or completion fees, monthly service charges, location of the borrower and many other factors.
An individual’s credit rating is extremely important when determining APR and will directly affect the level of APR you are likely to incur. The poorer your credit rating the higher the APR you will be faced with.
This is why it is important to maintain a good level of credit. If you start to fall behind when paying back borrowed credit your credit score will drop dramatically. This will be an issue when you next apply for new credit and you will be faced with higher level of APR as you will be seen as a higher risk to lend money to.
You should bear in mind that different lenders calculate their APRs in different ways. A person’s rating will differ according to where they are trying to get finance. Therefore you should shop around to try and get the most favorable deal and if you are refused credit from one lender you may be able to gain finance from another lender.
The lender cannot discriminate when determining APR rates. Your race and gender are not allowed to be used to determine your credit rating. There are however many things that will be considered like your credit history at your previous and current addresses. Your time in employment and the salary you earn. The most important thing they will check for is missed payment on any credit you have previously borrowed. If you have previously missed payments your credit rating will be negatively affected.
On the plus side people with a good credit rating may able to get finance at a low rate and be rewarded for a history of good repayments. Anything around the 7-9% APR is considered a good level of APR. For some people with a very bad credit rating the APR may be as high as 40-50%. This can lead to some people with bad credit ratings paying back double the amount they have borrowed.
The below figures can give you an idea about APR and how it relates directly to your credit score.
Average Car Finance APRs:
- Excellent Credit Status: 7% – 10% APR
- Good Credit Status: 10% – 15% APR
- Poor Credit Status: 15% – 25% APR
- Bad Credit Status: 25% – 50% APR
