What Is APR On A Car? Everything You Need To Know

in Ownership
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Most people would go about their car purchases by getting a car loan. If you’re thinking about getting a new or used car soon, there are several terms that you need to understand to ensure the best auto loan experience deeply. One of the most critical terms that require your intimate understanding is APR. 

We know that choosing a make, model, and other options when buying a car can be overwhelming. However, car loan shopping is just as important, especially if you plan to stick to a tight budget. Having said that, the APR is a vital concept you should keep an eye on when borrowing from a lender.

What is APR on a car?

Today, we’re highlighting APR and what it means to you in your car buying journey. Learn and use these explanations to build your financial knowledge and become a better shopper.

What is APR on a Car Loan?

Unless you’re paying in cold hard cash, you’ll likely need a car loan to purchase a new or used vehicle. However, the convenience of borrowing money from a lender to get a car comes with a cost – the interest charged by the lender on money borrowed. The APR or annual percentage rate on an auto loan refers to the yearly cost you’ll have to pay to finance your new vehicle.

However, you have to keep in mind that APR is different from the interest rate. A car loan’s APR is expressed in percentage and doesn’t just include the loan’s interest rate and other related fees (i.e., origination fees). Conversely, the interest rate only points to the annual cost of the borrowed money minus the fees.

APR is worth paying more attention to than simply the interest rate because the former factors all the associated charges, so you get the actual total cost of the loan. The fees are often called “prepaid finance charges” and may differ widely from one lender to the next, so it pays to be mindful of them. One example is the aforementioned “origination fee,” which is the fee charged by lenders for the cost of underwriting car loans.

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How Do I Find Out My APR?

Once you have the final offer of your loan written up, there are two primary ways to find out your APR.

Ask your lender

Thanks to the Truth in Lending Act (TILA), lenders are required by law to provide you with essential information about your car loan (i.e., your APR) to enable you to comparison shop for loans. One quick way to know about your APR is to ask your dealer or lender directly. If you have your final offer of the loan at hand, you should find the APR on your contract.

DIY estimation

Calculating your APR is undoubtedly an option if you’re willing to do some math. Basically, you need the following information if you wish to calculate your APR:

  • Loan amount – The total amount you need to finance the vehicle is usually the car’s sticker price minus your down payment and trade-in value if you have it.
  • Loan term – The number of months you need to pay off the loan.
  • Auto loan interest rate – This is usually a rough estimate of the interest until you formally apply.
  • Some associated fees – Like the aforementioned origination fees.

Calculating the APR usually starts with determining your monthly estimated payment. Once you have that value, you may proceed to calculate your car loan APR. CreditKarma made a detailed guide for more details on calculating your APR.

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What Makes APR Important?

Knowing full well what is APR on a car will allow you to have a better picture of how much it will cost you to borrow money from a potential lender. As you might expect, the lower the APR, the less money you’ll need to cover the loan.

APR is an excellent tool you can use for loan shopping. Since APR is expressed in percentage, it’s easy for prospective borrowers to identify which loans are the least expensive. Even a 1-2% difference can help you save money in the long run. The goal is to choose the lowest APR you can find.

For example, you’re choosing between two loans worth $23,000 and a 4-year term. One loan has a 5% APR, while the other from another lender has a 6% APR. As expected, you’ll pay more than $500 with the 6% APR loan than the 5% APR.

Factors That Determine APR

According to BusinessInsider, the average APR on a 60-month new car loan is 4.03%, and 4.17% for used models. However, your APR amount may vary depending on several factors, including:

  • Your credit history and score – The better your credit, the lower your loan rate is likely to be. Potential buyers with good to excellent credit scores may qualify for attractive APRs. On the other hand, poor credit scores will likely result in high-interest rates or downright refusal.
  • Your down payment – In general, the more money you put on the down payment, the lower your interest rates will be. More lenders and financing companies may let you borrow money with a sizable down payment. This is because you’re less likely to go upside down on your loan (owing more than your vehicle’s worth) and be treated as a low-risk borrower.
  • Your loan’s length – While it may seem better to have longer loan terms since you’re paying less every month, you end up paying more due to higher interest rates. The longer your loan term, the higher your APR will be.

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Understand Your APR

What is APR on a car? Hopefully, this quick guide has answered your questions. A deeper understanding of your APR and its factors can make your car loan shopping a much better experience. Therefore, before signing on the dotted line, ensure you know about the loan’s APR.

Remember that fees and interest rates vary from one lender to the next, so it’s always a good idea to shop around and compare rates.

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