Interest Rate Explained

The term Interest Rate is used to describe the amount you are charged for borrowing money by the lender. There are several types of interest rate which should be declared at the start of the finance agreement.

Creditplus Definition of Interest Rate

When it comes to car finance or any type of loan agreement, one of the most important aspects to consider is the interest rate. This is effectively how you are charged for being provided with the loan. It’s also the way the lender makes money, alongside any additional fees that may be included in the agreement.

The interest rate is calculated on a yearly basis and is set by the lender at the start of the agreement. The rate depends on a number of factors. These include:

  • The lender providing the loan
  • The customer’s credit history and circumstances
  • UK economy

Each lender has their own interest rates that they can provide to customers. Some lenders cater specifically for wealthier individuals, whereas others will cater to those with a poorer credit history. It’s important to have a look the lenders providing car finance before you commit to any agreement, just to be sure that they are providing the best rate for you. Creditplus compare over 100 lending options across a wide panel of lenders when you apply for car finance with us.

Your credit history is also another important factor. Lenders will adjust how much they can lend and what interest rate to charge based on your financial history. If you have a track record of making payments on time and no irregularities on your credit file, then you are likely to get more favourable rates. Whereas if you have defaulted on payments in the past or been refused credit elsewhere, you may find it more difficult to get a lower interest rate. Find out more about credit ratings over at our credit clinic.

The UK economy is also another factor. Banks will base the interest rates they provide on the Bank of England’s base rate. This is because the banks borrow money from the government, and so will set the amount of interest they charge based on how much the government charges them.

Wikipedia Definition of Interest Rate

"An interest rate is the rate at which interest is paid by a borrower (debtor) for the use of money that they borrow from a lender (creditor). Specifically, the interest rate (I/m) is a percent of principal (P) paid a certain amount of times (m) per period (usually quoted per annum). For example, a small company borrows capital from a bank to buy new assets for its business, and in return the lender receives interest at a predetermined interest rate for deferring the use of funds…"

Source: Interest Rate Wikipedia

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