How Do Car Finance Rates Work

If you’re here, then my guess is that you probably have plans of going for a car finance. However, you also find yourself asking this all important question of “How Do Car Finance Rates Work?”  Well, worry no more as this article answers that question by guiding you through on how car finance rates work and all there is to know before making a decision.

Virtually everyone wishes to own a car or two but not everyone can readily pay upfront for that car they so desire. So that is where car financing comes in. It might interest you to know that majority of the car owners you see in town bought those cars with the help of car finance.

Before answering the question of “how do car finance rates work?” lets first understand what ‘Car finance’ and ‘Car Finance Rates’ are.



According to Wikipedia, Car Finance refers to the various financial products which allow someone to acquire a car, including car loans and leases.

Car financing has become the most used avenue for purchasing either a new or used cars in the United States. With the help of car finance, it is possible to purchase your dream car by borrowing money and agreeing to pay back in installments. That way, you will be able to buy and drive your desired car at a time where you probably wouldn’t have been able to if you are to pay the lump sum.

Car Finance can be in the form of Hire Purchase (HP) or Personal Contract Purchase (PCP) or Leasing. Since the focus of this article is not on understanding the whole topic of car finance, I won’t be going into details in trying to explain what these forms of car financing is all about. However, an article will be solely dedicated to address the topic.

In the meantime, let’s quickly go into the subject matter.


Before opting to go for car finance, its best if you understand how the interest rates work and which one is best for you. This is because, each provider or lender may offer different interest rates.

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Car Finance interests are basically calculated using the simple interest formula and not compound interest. Now that’s some good news as your interest doesn’t earn interest as the months or years go by making it a bit cheaper to repay your car finance in the long run.

The amount you’ll be charged in interest depends on the interest rate and the amount you are borrowing. What this means is that the higher the amount of money you’re borrowing and the higher the interest rate of the lender means you’ll be paying more in terms of interest.

It is however important to note that car finance Interest rates depends on a few factors. They include value of the car, your income, debts, loan term, loan amount etc. Example: the higher your debts the higher the interest rates, the longer the loan term, the higher the interest rate. Also, the higher your income, the lower the interest rate because you are deemed to less risky as compared to one with a low income. Same way you’ll be offered a higher interest rate if you have a history of failing to repay your debts because you are more likely to fail to meet your repayment schedule.

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An understanding of how the whole car finance rates work will really help you when going for a car finance. You wouldn’t want to pay abnormal interests on your finance hence you must do your homework well before applying.

You may be tempted to spread your monthly installments over a longer duration in order to pay less each month. However, that may not be a smart move though as it will mean that you are going to pay more in interest meaning paying for your car at a higher cost as compared to when you make repayments within a shorter duration.

It is also very possible to negotiate with lenders for a car finance rate that suits you. You can enquire from various lenders before settling on one. This helps you when negotiating for the rates as you get a fair idea as to how much competing firms are charging.

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