25 May 2023 Concept Car
As interest rates continue to rise, being savvy about your loan terms has never been more crucial. Are you, too, looking to optimise your APR? Then this article is for you.
In this comprehensive guide, we will provide you with all the tools you need to obtain the most favourable APR (Annual Percentage Rate) for your car loan. We’ll debunk misconceptions, reveal what truly works, and equip you with five actionable steps that will genuinely make a difference.
So buckle up and get ready to embark on a journey that will save you money.
Before we delve into the intricacies, let’s clarify the difference between the APR and the interest rate on a loan. Although these terms are often used interchangeably, they carry subtle nuances worth exploring.
The interest rate represents the cost of borrowing and is calculated based on the loan amount. On the other hand, the APR encompasses all associated loan costs, including fees such as prepaid finance charges, and presents them as an annual percentage rate.
While the two figures are closely related, understanding the broader picture painted by the APR is crucial for grasping the total cost of your loan.
Now that we’ve laid the groundwork, let’s dive into the key factors that shape the APR.
While the base rate set by the Bank of England plays a fundamental role, it’s important to recognise that it’s not the sole determinant. If it were, we would all be subject to the same APR, which is clearly not the case. The overriding factor that towers above all others is risk.
Lenders carefully assess the probability of recovering their money, and this perception of risk significantly impacts the loan costs. Instances of previous defaults or regular late payments are viewed as red flags, increasing the risk associated with lending to individuals with low income, high debt, or a mediocre credit rating.
While this may initially seem discouraging for those facing financial difficulties, it provides valuable insight into how to negotiate a better deal—by mitigating the default risk and inspiring confidence in lenders.
Let’s address five commonly heard recommendations for securing a better APR. While these suggestions may seem promising, a closer examination reveals their shortcomings.
Negotiation is often touted as a solution for obtaining favourable loan terms. However, we believe this advice falls short for several reasons.
Firstly, it merely restates the question at hand: how to obtain the best possible deal. It offers no substantive guidance.
Secondly, negotiation can be challenging, particularly if you should have a poor credit score.
Furthermore, successful negotiation typically requires having leverage, which many individuals with bad credit lack.
Therefore, this advice offers little practical value.
Further Reading:
Just be nice! Why the soft strategy to car finance is key to success!
Why haggling is a mistake (and what to do instead)
Refinancing can be a powerful tool for obtaining a better loan deal, but the economic climate does not currently favor this strategy. As interest rates continue to rise, it’s wiser to hold onto your current deal if you can afford it.
Consider yourself fortunate if you already secured a favourable loan in the past. Why? Because the cost of car loans is likely to increase in the near future.
In this context, refinancing may not yield significant benefits.
Further Reading:
Refinance or Roll Over a Car Loan? What’s Best For Me?
Unsatisfied with the interest rate available at present? Waiting for more favourable deals might seem like a logical strategy. However, in the current environment, this approach is less advisable.
Here’s why: With inflation on the rise and projected to continue increasing, it’s prudent to secure a loan sooner rather than later.
Of course, we don’t advocate for hasty decisions. Taking the time to evaluate your options is essential. Just remember not to wait too long or hope for a sudden, dramatic drop in the APR. Such scenarios are unlikely to materialize.
Surprisingly, APRs for new cars are generally lower than those for used vehicles. You may wonder how this is possible, given the long-standing advice to opt for second-hand cars.
We can offer a simple explanation.
While it’s true that buying a new car can secure you a better deal, there are crucial factors to consider. Manufacturers often support dealerships by offering additional bonuses for each car sold. These benefits can be passed on to customers, resulting in significantly reduced APRs.
In a word: No.
It’s important to acknowledge that even with these rebates, new cars are typically more expensive than their older counterparts sold in reputable showrooms like ours in Manchester.
And don’t forget that depreciation takes a substantial toll on the value of new vehicles during the first few years of ownership.
So, while attractive new car deals may catch your eye, it’s crucial to carefully weigh the overall costs and potential regrets.
Further Reading:
How can new cars be cheaper than second hand ones?
Is it harder to finance a used car than a new one?
Used is the new NEW: More than ever, used cars rule supreme!
The just as new car is the new star
Paying off your loan quickly may seem like the most logical solution to reduce the risk of default. After all, the longer the loan term, the greater the possibility of unforeseen circumstances derailing your repayment plans.
However, we caution against rushing to pay off your loan as fast as possible. While it’s true that shorter loan terms generally result in lower interest rates, opting for an accelerated repayment schedule may have unintended consequences.
Higher monthly payments leave you with less disposable income and reduce your ability to set aside funds for emergencies. It’s crucial to strike a balance—a repayment plan that ensures you can reliably meet your obligations throughout the term, even in the face of unexpected surprises.
Now that we’ve dismantled the misconceptions, let’s explore five recommendations that will genuinely reduce the risk of default, making you a more appealing borrower in the eyes of lenders.
Undoubtedly, the most impactful recommendation we can offer is to make a down payment. It’s virtually guaranteed to lower your APR and save you money over the life of your loan.
We understand that down payments may seem challenging, especially if you’re already facing financial difficulties. However, they’re not as unattainable as they may initially appear.
For instance, let’s say you’re looking at a monthly payment of £300. By diligently saving that amount for four months and supplementing it with funds from your savings, you can accumulate a down payment of £1,500. This demonstrates your commitment and significantly strengthens your negotiating position.
Even with the current inflation rate, waiting four months is still a reasonable timeframe.
It goes without saying that securing a higher credit amount for an expensive car presents a greater risk compared to a modest loan for a more affordable vehicle.
Reducing your expectations slightly can make a notable difference in your APR. Sometimes, opting for a car that’s £1,000 less expensive can lead to significantly improved loan terms. Alternatively, you can explore our offerings at CCC.
As specialists in car finance for those with bad credit, we design special deals tailored to individuals who have faced financial challenges in the past. These deals may open up opportunities to secure car finance for a vehicle that you wouldn’t otherwise be eligible for.
While banks and dealerships naturally prioritise profits, your friends and family often possess a genuine desire to help. Leveraging their support can prove invaluable in lowering your APR.
As previously mentioned, a down payment can effectively reduce your loan’s interest rate. With the assistance of your family, you can inspire greater trust in lenders while securing improved financial terms.
Furthermore, consider the option of having a friend or family member co-sign the loan. We understand that financial matters can be sensitive, especially within family dynamics.
If you require further guidance in navigating this terrain, we have a dedicated blog post addressing this topic comprehensively.
Having debt is not inherently detrimental to securing a favourable loan. However, it does increase the risk of default, thereby impacting your APR.
A prudent strategy for maintaining lower interest rates is to actively reduce your existing debt. Although easier said than done, it’s a goal worth pursuing. Our blog provides extensive resources on debt reduction strategies.
Additionally, bear in mind that dealerships and banks generally view a smaller number of lenders and consolidated debt more favorably. This transparency enhances your financial profile, increasing the likelihood of improved APR offers.
While many articles prioritise credit scores as the primary determinant of APR, we take a slightly different perspective.
Although credit scores offer insights into past financial behaviour, they lack the contextual backdrop of your credit history, rendering them less impactful. For us, credit scores serve as a secondary consideration. Instead, we focus on your long-term affordability and encourage you to take positive steps towards a secure financial future.
However, it’s worth noting that pursuing the recommendations outlined above will naturally lead to an improved credit rating. This positive side effect is indeed a promising indicator of your financial health and can contribute to securing a better APR.
So, while not the sole determinant, investing effort into raising your credit score is beneficial for your overall financial well-being.
Acquiring a better APR for your car loan is not an insurmountable challenge. By dispelling common misconceptions and embracing effective strategies, you can reduce the risk of default, secure improved loan terms, and save money over the course of your loan.
Remember to make a down payment, consider more affordable car options, seek support from friends and family, reduce and consolidate existing debt, and take positive steps towards improving your credit score.
It goes without saying that the support of a trustworthy partner is invaluable in this regard. At Concept Car Credit, we have many years of experience with car finance for those with a bad credit score.
Would you like to explore your options? Then give us a call at 0800 093 3385.
25 May 2023 Concept Car
