In the UK, interest rates are soaring. The Bank of England increased its benchmark rate up to 3% in November, which is the eighth increase we’ve seen in just under a year. Mortgages have been hogging the headlines and rightly so, but there are additional issues that come into play when interest rates increase, including for those in the market for a new car.

What are the effects of rising interest rates?

Rising interest rates can impact people in a number of ways. In terms of savings, higher interest rates can be more beneficial, as it means your savings are earning more money – people often shop around for savings accounts with higher interest rates.

However, when it comes to mortgages or other types of loans, a higher interest rate is less welcome. This means that over time, you will need to pay back more money, which is why it’s important to work out whether you’re able to afford to take out a loan in the first place, as high interest rates can hit people severely, especially if loans can’t be paid back in a shorter amount of time. This can also be tricky when it comes to car financing options too.

How will financing a car get around this?

If feasible, you could look into borrowing less in the first place to avoid having to pay more, because with a higher interest rate, this could result in significantly higher repayments. Then of course, it’s logical to look into buying a cheaper car if you want to avoid getting yourself in a tricky situation with large repayments. This may include opting for a used car over a brand new one.

As an alternative, some people might investigate other options to raise funds, such as equity release, which allows you to access tax-free funds from the value of your home.

How much more expensive will buying a car be?

It’s important to understand the ins and outs of the car financing package you choose to go with. Different options will offer different payment patterns and ultimately, you need to check whether increased interest rates will impact the payments you’ll have to make.

If you are looking for a car currently, it’s worth remembering that quotes are variable in the current market. A quote you may have been given a few days ago could quickly become out of date already. This is the case for used car finance – new car finance may allow for more wriggle room as lenders try to convince you to sign up.

With interest rates how they are currently, this will likely add a few pounds to your monthly bill, however, it’s the threat of yet more interest rate increases that poses a risk to prospective buyers.