How UK Interest Rate Cuts Are Changing Car Finance in 2025

What has the Bank of England announced?

On 8 May 2025, the Bank of England cut its base interest rate from 4.5% to 4.25%. This is the lowest rate we have had in nearly two years. They made this choice because inflation seems to be slowing down. Still, the Bank mentioned there is some uncertainty in global trade due to new US tariffs.

The Monetary Policy Committee (MPC) did not have a unanimous decision in their vote.

• Five members voted to lower it by 0.25%.
• Two members wanted a bigger cut of 4%.
• Two members preferred to keep it as it is.

This shows that even though inflation is improving, the UK economy still faces various challenges. This is especially true when we think about future global trade and growth.

Why do interest rate cuts affect car finance?

Interest rates directly affect the annual percentage rate (APR) for car loans, PCP (Personal Contract Purchase) deals, and hire purchase plans. If the Bank of England lowers its base rate, lenders may offer lower representative APRs. Because of this, borrowing could be easier and cheaper for everyone.

Lower rates can lead to:

• Reduced monthly payments
• Smaller payments at the end of the contract, especially for PCP deals
• Better deals for those with a good credit rating or stable bank account

The rate you receive will depend on your personal circumstances. This includes your credit score, the loan amount you want, and whether you are a UK resident.

How much can you save after a rate cut?

Let’s look at an easy example that shows how common car finance options change before and after the interest rate cut.

Note: These numbers are just examples. The actual monthly payments and final payment for a PCP agreement can vary widely. This depends on the lender, the kind of vehicle, and the number of miles allowed.

What is PCP and how does it work?

Personal Contract Purchase, known as PCP, is a popular way to buy a new car in the UK. Here’s how it works:

• You put down a deposit and agree to make monthly payments.
• The contract has a mileage limit. This is usually between 8,000 and 12,000 miles per year.
• At the end of the contract, you can:
  • Make the final payment (Guaranteed Minimum Future Value) and keep the car.
  • Return the car without any more payments, if it meets the mileage and condition limits.
  • Trade it in for a newer model.

Since you are not paying the full price of the car, monthly payments are usually less than those for hire purchase or a personal loan.

What is the difference between Hire Purchase and Personal Loan?

How can a rate cut help with car finance approval?

Lenders usually begin with the base rate. They then add a margin based on risk. A lower base rate helps them provide better personalised quotes, especially for those with:

• Good credit scores
• A strong current account or bank account history
• Proof of income from online banking records

Some lenders use apps to look at your personal situation and give you quick quotes. If you are a current account holder and in good standing, it can boost your chances.

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Can interest rates go up again?

Yes, the Bank of England changes interest rates depending on inflation, how the economy is growing, and what happens in global markets. If inflation rises, or if factors like bank holidays, tariffs, or supply problems raise prices, interest rates may increase again.

Now could be a great time to get a lower APR on your car loan or PCP agreement. This is true, especially if you are looking to move to a newer model.

What if I have a low credit rating?

A lower credit rating can lead to a higher maximum APR. But, getting your rate cut can still help. For those with bad credit, the average representative APR may drop from around 24.9% to 22.9%. This change can reduce your overall costs during the loan period.

Example for Poor Credit:

Every bit helps when it comes to affordability.

What if I need help with repayments?

If you have a car finance agreement and are struggling because your income or living costs have changed:

• Speak with your lender. They may have options like forbearance or other payment plans.
• Consider getting free debt advice from approved UK organisations.

Not paying your bills can lower your credit score. It’s important to act fast.

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FAQs about how interest rate cuts affect car finance

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