Interest rates have been hogging the headlines lately. Here’s a quick look at what interest rates are, what types of interest rates exist, and how you can get the best rate on your car loan.
What are interest rates? Why are they important?
Interest rates matter because they can make a huge difference to the cost of borrowing money. A high-interest rate on a personal loan, for example, could end up costing you thousands of pounds in extra repayments over the course of your loan. And if you’ve got an overdraft, it’s worth bearing in mind that you might also be stung by interest charges for using it.
What types of interest rates are there?
There are different types of interest rates, including annual percentage rates (APRs) which show how much the interest rate changes each year. For example, a loan with an APR of 15% would have a monthly repayment amount that was 1.5% higher than the previous month. And a loan with an APR of 30% would mean that your monthly repayment amount was doubled from one month to the next.
Many lenders and credit card providers also offer introductory deals where interest is charged at a low rate for a set period of time, such as 0% on balance transfers or on purchases (usually on new purchases, not on any repayments you make).
Some credit cards allow you to fix the interest rate for a period of time, meaning that it can’t go up unless you’re in serious arrears. It’s important to remember though that if your card has an introductory offer at 0%, but comes with a higher than average APR once the offer ends, you could end up paying a lot more than if you had just borrowed the money at an everyday rate.
Comparison rates are another important type of interest rate, and they show what the total repayments on a loan would be over a certain time period. They’re basically a combination of two things: an effective interest rate (which takes into account your payments in addition to any interest you’ve been charged), and a term or length of time that it takes to pay off the loan. So the total amount you end up paying back will vary depending on your repayments and how long it takes to pay off. Comparison rates include most of the fees you’ll be charged on your loan.
Understanding the different types of interest rates can be confusing, but it’s important to understand them in order to get a clear picture of what your loan or credit card repayments would be if you were borrowing money.
Getting the best rate
In order to get the best possible interest rate on your car loan, it’s really important to shop around and compare quotes. Just remember though that even with a good rate, your monthly repayments will still be higher than they would be if you had borrowed the money in cash, so factor this in when making your car loan decision.
You should talk to a few lenders to find out what they have on offer, and keep in mind that different companies might offer you different balances for your loan, so there’s no point looking at loans with a low-interest rate if your car dealer can only get you a higher balance from another lender. Check out a comparison website like Driva, where you can get personalised quotes from a range of lenders.
Keep in mind that the higher your credit score, the lower rates you’ll be able to access.