What is APR? What does APR mean? If you’re looking to buy a car, whether it’s new or used, you’ve probably been told to check the annual percentage rate (APR) of the loan. But what is APR? How can you use it in your car-buying decision?
For shoppers interested in buying a new car or truck, one of the main steps that involves is determining the cost of your auto loan. Determining your monthly car payments means understanding what you will be paying in interest over the course of your loan. The APR or annual percentage rate is a standard metric to evaluate this. This article will explain how APR works and how you can use it to compare auto loan offers from various lenders.
We define APR as a yearly rate. But, this does not reflect the cost of borrowing money for the various time frames we use. Because there are often many longer-term loans that are broken down into shorter periods, there’s also a calculation for APY (Annual Percentage Yield). APY takes into account the effects of compounding interest and its impact on the time value of money. For example, if you borrow $100 from me at 10% per year, you’ll pay me back $110 in one year. That would be a 10% APR loan. If the same loan was payable in monthly installments, however, that $110 would be paid back to me over twelve months (the equivalent of ten payments), resulting in an APY of 11%. In which case, your APY is greater than your APR.
APR stands for annual percentage rate. It is a measure of the interest rate you will pay on your auto loan, expressed as a yearly rate.
To calculate your APR, you need to know what the interest rate is (the number), and how much money you are borrowing (the dollar amount). Then, multiply the interest rate by the number of years you plan to borrow the money for:
APR = Interest Rate x Number of Years
For example, if you have an auto loan with an interest rate of 6%, and you are borrowing $25,000 over four years, your APR is:
APR = 6% x 4 = 24%
When you apply for a car loan, you’ll receive a quote from the lender. It will include the loan amount, term, and projected monthly payment based on these figures. You’ll also notice the annual percentage rate (APR), which should not be overlooked as it could easily add several hundred or thousands of dollars to the vehicle’s total purchase price.
What is APR (Annual Percentage Rate)?
The APR you pay on an auto loan represents the cost of borrowing funds from the lender.
Is APR the Same as the Interest Rate?
Consumers often use the terms interest rate and APR synonymously, but they aren’t quite the same. The interest rate is the percentage of the principal amount the lender charges you to borrow funds. However, the APR includes interest and fees, like loan origination costs you’ll pay when financing the vehicle.
Why the APR Is Important for a Car Loan
The APR is important because it tacks on a sizable amount of additional costs to the loan. So, shopping around for an auto loan is essential to ensure you get the best deal possible on financing.
APR and Your Credit Score
The lowest APRs are generally reserved for borrowers with good or excellent credit. Of course, a bad credit score doesn’t necessarily mean you’ll be denied an auto loan. Still, you can expect borrowing costs to be higher.
To illustrate, a 60-month $30,000 auto loan with a 5 percent interest rate comes with a $566 monthly payment, and you’ll pay $3,968 in interest over the loan term. But if your credit score is on the lower end and you get a 9 percent interest rate, the monthly payment will increase to $623, and you’ll pay $7,365 in interest over the life of the loan.
Calculating APR on a Car Loan
Follow these steps to calculate the APR on an auto loan with ease.
Get Information on Your Car
You’ll need to prepare the following details to get started:
- Principal $35,000
- Interest Rate: 6 percent
- Loan Term: 48 months
- Projected interest: $2,200
- Fees: $1,500
- Taxes: $3,000
Once you have these figures, plug them into the APR equation below.
Plug Them into the APR Equation
- APR = [(Interest, taxes and fees / principal / loan term in days) * 365] * 100
- APR = [($6,700/$35,000/1,460) * 365] * 100
- APR = 4.79 percent
Or Use an Online APR Calculator
You can also input these figures into an APR calculator that will do the calculations for you.
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How Lenders Calculate APR
Most lenders assess your APR based on your credit rating, assuming you meet the other eligibility criteria. As mentioned above, with a higher credit score, you’re more likely to receive a competitive APR. But if your credit score is on the lower end, expect to be offered a higher APR to offset the risk of defaulting on the auto loan that you pose to the lender.
Other factors lenders consider when calculating APR include:
- Principal: The loan principal or the amount you’re requesting to borrow
- Down payment: You may not be required to make a down payment. However, doing so could get you a lower APR on your auto loan
- Loan term: You’ll pay more in interest if you opt for an extended loan term, which could overshadow the benefit of securing a more affordable monthly payment
What is a Good APR for a Car Loan?
It depends on your credit rating. Borrowers with good or excellent credit scores can expect to pay an APR between 3.61 percent and 5.38 percent. But if your score is lower, you could get an APR from 9.8 percent to 19.87 percent.
Compare APR and Loans to Refinance Your Car Loan
If your credit score has already improved since you took out your original car loan, you could qualify for a lower APR by refinancing. Consider Auto Approve to help you get the job done, minus the hassle.
Interest rates from lending partners in the Auto Approve network start at 2.25 percent. You can get a rate quote in minutes without impacting your credit score. Here’s how to get started:
- Step 1: Submit your details to get pre-approved. Be prepared to answer a few questions to verify your identity. You’ll also need to input data about your employment, earnings and vehicle.
- Step 2: View your loan offers. If there’s a match that works for you, upload the requested financial documents and information. You’ll need to provide a copy of your driver’s license, current proof of insurance, a current registration, proof of income (or pay stubs) and your current auto loan contract if you have it available. The team at Auto Approve will handle all the paperwork for you and ensure you steer clear of all the tedious tasks that often come with refinancing auto loans.
- Step 3: Sign your loan documents. Once the loan is finalized, you’ll start paying the new lender, typically within 45 days. However, you may qualify for a 90-day payment deferral that lets you keep more of your hard-earned money in your pocket even longer.