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  • Jul 6, 2023
  • 3 Minutes

Understanding changing interest rates and your vehicle finance

If you’re feeling overwhelmed about the cost of living, you’re not alone. The terminology used is often confusing and it can be difficult to understand how it relates to you and your household.

Find out what inflation and changing interest rates could mean for you and your vehicle finance. 

What is inflation? 

Inflation is the term used to describe price increases over time. If inflation is at 5% for example, it means that prices are 5% higher on average than they were a year ago. For example, a bottle of milk today could be £1.05 vs. £1 last year.

Inflation is measured every month by the Office for National Statistics, and it can rise or fall based on supply and demand. The UK’s target inflation rate is 2% because it allows prices to increase roughly in line with wages, keeping the cost of living affordable.

What is the base rate?

The base rate is the rate the Bank of England charges banks and other lenders when they borrow money. It’s designed to regulate inflation by encouraging people and businesses to either spend, save, or borrow.

Financial lenders use the base rate to inform the interest rates they charge customers for products such as loans, mortgages, and vehicle finance.

What makes the base rate rise or fall, and how often does it change?

The base rate can change to influence the UK economy and is reviewed by the Bank of England eight times a year. It doesn’t change every time it’s looked at and can stay the same for months or even years at a time.

When the base rate rises, interest rates may also rise. When this happens, it costs more to borrow money, so people will be more likely to save, and spend and borrow less. Inflation slows down as a result.

If the base rate goes the other way and falls, the opposite happens. It costs less to borrow money so spending and borrowing become more popular. Demand for products, services and goods increases, and inflation too rises. 

Why do interest rates matter?

Interest rates influence how much money people save, spend, and borrow. When the rate is low and it’s cheaper to borrow money, people may be more likely and confident making investments, such as taking out a mortgage or car loan. Higher rates go hand in hand with savings, as you may be able to earn more interest on the money you keep aside.

How can changing interest rates affect your vehicle finance?

Car finance plans are unique to everyone depending on vehicle model, agreement length and deposit paid.

As with any financial loan, interest rates will determine how much extra you will pay for the car on top of the sum borrowed for the vehicle. You will borrow a set amount to buy the car, which will either be the full price, or the full price minus a deposit. Interest is added to this to work out the total amount payable, which is then split into monthly payments.

Will interest rates impact the agreement I have with Volkswagen Financial Services?

If you have an existing finance agreement with us there’s no need to worry, our interest rates are fixed from the moment your finance agreement is activated.

If you are considering finance for your next vehicle with us, your interest rate will also be fixed for the duration of your agreement, helping you plan your monthly outgoings. If you need any assistance planning your budget, we have some handy guidance available here.


Sources: Bank of England, Interest rates and bank rates

               Office for National Statistics, Inflation and price indices

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