Why Is My Car Finance Interest Rate High? (And How to Lower It)

If you’ve applied for car finance and discovered your interest rate (APR) is higher than expected, you might feel frustrated or unsure why this happened. Higher interest rates mean higher monthly repayments, which can put pressure on your finances.

In this guide, we’ll explain exactly why your interest rate might be high and share practical steps you can take to lower it.

You’ll learn:

• What factors affect car finance interest rates.
• Common reasons why you might receive a high interest rate.
• Actionable steps you can take to secure better finance terms.

How Interest Rates on Car Finance are Set

When lenders decide on your interest rate, they assess the level of risk involved in lending to you. Factors influencing this include:

• Credit Score:
  A lower credit score typically indicates higher risk, resulting in a higher APR.

• Affordability:
  Lenders assess your income, monthly expenses, and financial stability. The clearer your ability to manage repayments, the lower your rate will typically be.

• Deposit Size:
  A larger deposit reduces the loan amount and lowers risk, often resulting in better rates.

• Loan Term:
  Longer finance terms might have higher interest rates to account for increased risk over time.

Understanding these factors can help you take control and secure better terms in the future.

Reasons Your Interest Rate Might Be High

Common reasons your car finance interest rate might be higher include:

• Poor or Limited Credit History:
  Missed payments, defaults, CCJs, or limited credit history suggest higher risk to lenders, leading to higher rates.

• Existing Debts or Financial Commitments:
  High existing debt levels or missed payments may result in lenders increasing your interest rate due to perceived risk.

• Low or No Deposit:
  If you’re financing 100% of the car’s value, lenders take on greater risk—often reflected in a higher interest rate.

• Type of Lender:
  Specialist lenders dealing with poor credit may charge higher rates due to increased risk.

If any of these apply to you, don’t worry—there are still ways to reduce your interest rate.

Practical Steps to Lower Your Car Finance Interest Rate

Improve Your Credit Score

Improving your credit score can have a significant impact on your APR. Here’s what to do:

• Pay all bills on time – even small bills contribute to a healthier credit profile.
• Reduce credit utilisation – keep your balances below 30% of your total available credit.
• Correct errors on your credit report – mistakes can lower your score, so check reports from Experian, Equifax, or TransUnion and dispute inaccuracies.
• Register on the electoral roll – this helps verify your identity, improving trustworthiness to lenders.

For detailed advice, read our guide on How to Improve Your Credit Score for Car Finance.

Practical Steps to Lower Your Interest Rate Further

If improving your credit score alone isn’t enough, consider these additional steps:

Increase Your Deposit

A larger deposit reduces the lender’s risk by lowering the total loan amount, which can significantly lower your interest rate.

• Even an additional £500–£1,000 upfront can make a noticeable difference.

Choose a More Affordable Car

A lower-priced vehicle reduces the amount you borrow, directly lowering monthly payments and potentially your APR.

• Selecting a slightly older or smaller vehicle could result in significant savings each month.

Demonstrate Clear Affordability

Provide detailed income and expenditure information to reassure lenders you can comfortably manage repayments.

• This increases your chances of approval and may lower your APR.

Alternatives if Your Interest Rate Remains High

If your interest rate is still high, you still have options:

• Shorten Your Finance Term:
  A shorter repayment term reduces the total amount of interest paid over time, even if monthly payments slightly increase.

• Consider a More Affordable Car:
  A less expensive car will reduce your monthly payments and potentially make higher interest rates manageable.

• Wait and Reapply Later:
  Improving your financial situation over 3–6 months may lead to better finance offers.

How to Lower Your Car Finance Interest Rate

If your car finance interest rate feels too high, here’s how to improve it:

• Actively improve your credit score before reapplying.
• Offer a larger deposit to reduce risk.
• Demonstrate clear affordability to lenders.
• Choose a more affordable car or adjust your finance options.

Even if your credit score isn’t perfect, taking these proactive steps can help you secure a better rate and save money overall.

If you’re unsure about what finance options you currently qualify for, Motorly can help.

Check your eligibility now and find out if you can secure a lower-interest deal – Check Your Finance Eligibility Now.