How will the interest rate rise affect car finance?

We’re all keenly watching our finances, though it’s fair to say we’re not always confident on what the impact of recent events like interest rate rises will be. Are we going to end up paying more? Is it going to impact the value of our car?
Let’s look at some of the key impacts the interest rate rise will have on drivers, as we currently know them. We’ll update this article as we go, so if you have any questions, contact us on social media. As ever, this guide does not constitute legal advice. If in doubt, confirm details with the dealership and check free, impartial sites like Money Helper (formerly Money Advice Service) and Citizen’s Advice.

If you borrow money – a bank loan, a mortgage, a finance package on a car – you are charged. The interest rate is the amount you’re charged for borrowing the money.
The amount you’re charged is commonly shown as a percentage – for example, 4% or 10%. Over time, you have to pay back the money you have borrowed, plus the interest rate – which is a percentage of the total you owe added on. You’ll see the term annual percentage rate (APR) when looking at car finance. All loans issued in the UK must be presented with an APR rate, so it’s helpful to use for comparisons. The APR is the total rate of interest charged against the money you borrow. APR includes the fixed interest rate, plus extra costs and fees (like admin charges) into consideration. You can learn more about APR (and flat rate interest) here. On the other hand, if you’re saving then interest rates show you how much you’re “rewarded” for saving. The rates for borrowing and saving can be different. Different providers can offer different rates too – that’s why many finance providers, or savings accounts, compete to offer the best rates to people.

The Bank of England sets the “base rate”, which influences all other rates in the UK.
Since December 2021, the Bank of England have increased the base rate from 0.1% to 3%. They are raising the base rate because inflation is too high. Inflation refers to the rising prices of things over a period of time. Prices are spiralling in the UK due to a number of factors, which means the rate of inflation (how quickly prices go up) is too high. Raising interest rates is intended to help get inflation down. Initially, it will mean higher borrowing costs and higher loan rates. But in the long term, it should bring inflation down and help reduce the cost of living.

Finance has always been a popular way to buy a new car, with 90% of new car purchases funded via a finance arrangement.
With interest rates rising, the annual percentage rate (APR) on car finance is likely to go up too. This means loans will be expensive overall, with higher monthly payments and total cost of the purchase. Those already in finance agreements won’t see any increases until the end of their contract so will be shielded, at least for now, from the immediate effects of these rises. If you’ve taken out a loan before – you’ll have heard of fixed rate and variable rate interest. Most car finance agreements used fixed interest rates. Fixed rate interest stays the same for a set period of time (covered in the contract). So if you have a fixed interest rate currently in place, you won’t see the current fluctuations in your monthly payments. It pays to stay aware of changes though – we don’t know how long the interest rate rise will last, so if your fixed rate period is due to end, you’ll likely see the cost of your repayments increase. Variable interest rates are more commonly used on mortgages. They are calculated using the Bank of England’s base rate and an individual’s credit history. As the base rate has gone up, variable interest rates are going up too. Generally, those with stronger credit histories pay lower variable interest rates but you should always check the details of a contract before you sign and ensure you can afford to pay the highest potential variable interest rates. When the Bank of England last put interest rates up, we didn’t see a sudden hike in the cost of car finance – but we did see that the annual percentage rate (APR) on new car finance grew by +3.3% year-on-year. The APR on used car finance, however, only grew by +1.4% year-on-year. Over the last year or so we’ve seen an increase in demand for used car finance – with up to 45% of used car sales now being done via finance. Time will tell how car finance interest rates will be impacted this time around. For more information on interest rates and finance packages, you can consult free, impartial sites like MoneyHelper or Citizen’s Advice.

At Auto Trader, we continuously monitor any changes in the aftermath of interest rate rises or financial market movements.
We have seen that consumer demand for cars is still high on our site – cars are something we can’t live without. As you’ve probably seen, this increased demand, coupled with supply constraints, is the main stimulus for keeping prices high (especially for used cars). As the prices are higher than they were pre-pandemic, we’re seeing an increasing number of consumers turn to finance to buy their next car. We’ve seen people searching on Auto Trader for cars available on finance increase by 43% on pre-pandemic levels and by 8% since 2021. We’d recommend anyone considering finance to take their time and do their research properly – we have a dedicated hub on all things car finance, which covers the different types of finance package so you can find a way of repaying that suits you.

The ongoing surge in the values of used cars means millions of car owners in the UK may find the vehicle sitting on their driveway could be worth considerably more than they think, in many cases, more than they originally paid for it.
You can find out how much your car is worth with a free car valuation here. If you already own your car, it’s improved resale value could shield you from some of the effects of higher prices and interest rates – for example if you part-exchanged for your next vehicle or got an instant cash offer.