Car finance: what is APR/interest?

  • What do I need to know about APR and interest?
  • Why you should think about deposit contributions
  • Parkers explains car finance terms

APR – Annual Percentage Rate of charge – lets you compare interest and other charges across loans.

What do I need to know about APR?

The higher the APR charge, the more you’ll repay when borrowing money. An overall APR charge applies to finance deals such as PCP and Hire Purchase schemes – as well as bank loans – and the lender must tell you what this figure is before you sign an agreement. 

The APR figure shows the premium you’ll pay in exchange for the loan, including interest and any other charges that must be paid, such as an "Arrangement Fee" or "Option to Purchase Fee".

Many car manufacturers offer 0% APR – meaning that you will not have paid any more than if you paid cash upfront should you buy the car at the end of the finance contract. Others, however, come with APR charges as high as 7.9% and even more than 20% in the case of used car finance or loans. 

High-APR loans could potentially add more than a quarter of the car’s price in interest over four years – so searching for the lowest APR finance deals could save you thousands.

What is the difference between interest and APR?

Interest is one of the factors that affects how high the APR figure is – but it is not the only element included.

All other charges that must be paid by borrowers are also shown in the APR quoted. Therefore, you’ll want to compare the APR figure rather than the interest rate when looking at different finance options, as the interest figure might doesn't include any additional fees you might have to pay. 

Don’t forget to take deposit contributions into account

The APR figure is an important factor in establishing how good value a finance deal is. However, a large deposit contribution – which is effectively just one big discount – can more than outweigh any APR charged.

Therefore, keep an eye out for any deposit contributions – as these can amount to in excess of £10,000 – and could more than outweigh the APR, turning what looks like a bad value finance deal into a great one.

Alternatives/Similar to

Interest rate.

Want to find out more about car finance? Take a look at our car finance section or head to the Parkers Car Glossary for more motoring meanings