Could your next car cost more? How the Bank of England’s rate rise affects car buyers

Looking to finance your next car? Consumer writer Siobhan Doyle explores how the Bank of England’s latest base rate rise could affect car finance agreements and your monthly payments.

We’re all keen to keep an eye on our finances, but the Bank of England’s latest announcement could further squeeze already stretched budgets.

It has increased its official base rate from 3.75% to 4%, marking the first time the Monetary Policy Committee has increased rates since August 2023.

The central bank’s base rate is what it charges other banks and building societies to borrow money. Changes to this rate can influence the interest rates lenders offer on car finance agreements.

So, what does this mean if you’re thinking about buying your next car? Here’s how rising interest rates could affect car finance, monthly repayments and your budget, along with some tips to help keep your next car affordable.

Remember, you can buy a brand new or used car right here on Carwow. And you can sell your car, too. We’re here to help you through every step of your car-changing journey.

What you need to know

Car finance could become more expensive

Now that the Bank of England has increased its base rate, borrowing costs for lenders could also rise. These increased costs may be passed on to customers through higher annual percentage rates (APRs) on new car finance agreements.

However, car finance rates don’t automatically rise by the same amount as the base rate. Lenders also consider funding costs, market competition and individual customer circumstances, so any increases will vary and won’t necessarily be significant.

Monthly repayments could increase

A higher APR means you’ll generally pay more interest when financing a car. This could increase your monthly repayments for the same vehicle, deposit and finance term.

How much it’ll cost will depend on the interest rate you’re offered, how much you borrow and the length of your agreement.

Existing fixed-rate agreements are usually protected

Already have a Personal Contract Purchase (PCP) or Hire Purchase (HP) agreement with a fixed interest rate? The Bank of England’s rate rise shouldn’t affect your monthly repayments – it will remain the same for the duration of your term.

However, if you’re considering changing your car, there’s something worth keeping in mind. Some lenders offer a variation of HP, often referred to as a ‘Balanced Payment Plan’, where the interest rate can fluctuate in line with a reference rate, such as the base rate.

Always check with your lender or broker upfront whether the finance product you’re considering has a fixed or variable interest rate. Variable rates can expose you to higher monthly repayments when interest rates rise.

Tips to keep your next car affordable

Rising interest rates make it particularly important to understand what you can comfortably afford before taking out car finance.

Here are some ways to help keep your next car within budget:

• Understand the interest rate you’re being offered and how it affects the total cost of the car.
• Look at both PCP and HP to find an agreement that suits your circumstances.
• Consider putting down a larger deposit to reduce your borrowing and monthly repayments.
• Check your credit history as this can influence the finance options available to you.
• Factor in running costs such as car insurance, road tax, fuel/charging, servicing and maintenance.
• Consider whether a less expensive model could better suit your budget.
• Look at the used car market as these tend to offer lower prices and reduce the amount you need to borrow.
• Also consider leasing a car. The monthly payments are typically fixed for the duration of the lease agreement, meaning you won’t be exposed to increases in interest rates during the contract, unlike with a variable-rate car loan.
• Compare finance terms by looking at different agreement lengths. Keep in mind, though, that a longer term could mean paying more interest overall.

Rising interest rates and car finance FAQs

Do rising interest rates affect existing car finance agreements?

Not usually if you have a fixed-rate PCP or HP agreement. Your monthly repayments should remain unchanged for the duration of the contract. Variable-rate agreements may be affected.

Will car finance APRs increase when interest rates rise?

They can, but not necessarily by the same amount. Lenders consider factors including funding costs, competition and individual customer circumstances.

Is PCP or HP better when interest rates rise?

Neither is automatically better. PCP typically offers lower monthly payments but includes an optional final payment if you want to own the car. HP spreads the cost across the agreement, with ownership transferring once all payments are made. Compare the APR, monthly repayments and total amount payable.

Should I buy a new or used car when interest rates rise?

Used cars may offer lower purchase prices and require less borrowing. However, the best option depends on the vehicle, its condition and the finance deals available.

Car change? Carwow!

Looking for a new set of wheels? With Carwow you can sell your car quickly and for a fair price – as well as find great offers on your next one. Whether you’re looking to buy a car brand new, are after something used or you want to explore car leasing options, Carwow is your one stop shop for new car deals.

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