What is APR on a Car Loan?

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Megan Foukes is a recent graduate from Indiana University who graduated with a bachelor’s in journalism. Megan works as a content writer for Auto Credit Express and contributes to several automotive and finance blogs.


, - August 3, 2018

If you’re taking out a car loan, it’s important you understand what your annual percentage rate (APR) means and how it’s calculated. APR is the total cost of financing per year including fees, and is represented as a percentage. Now that you know what an annual percentage rate is, why should you be concerned about it when taking out a car loan? It all comes down to money.

How Does APR Work on Car Loans?

According to ValuePenguin, a personal finance website, the typical APR in 2018 is around three to 10 percent on a 60-month car loan with a 4.21 percent average interest rate. But, that’s if you have good credit. If you have bad credit, you can expect to have an APR that's higher than average. Because the APR amount can be different, you should know what lenders use to determine your APR. Your APR is generally based on three main factors:

  1. Your credit score and history
  2. Whether you’re buying used or new
  3. The loan term

Remember that lenders may look into other factors – such as geographical location – outside of the three main ones to set the interest rate. Ideally, if you have a good credit score, buy new, and choose a shorter loan term, your APR should be lower. Unfortunately, that’s not the reality for many car buyers, and if they have bad credit, they most likely will be financing a used vehicle – hiking up their APR. If you don’t get an ideal APR in your car loan, the good news is you can usually refinance later for a better rate.

Difference between APR and Interest Rate

But, wait, why are there two percentages listed? One of them is your APR – typically a higher percentage – and the other is your interest rate. These aren’t the same thing, but they both determine the cost of your car loan. Your interest rate is applied to the amount of money you borrow and doesn’t include fees or accrued interest, while your APR is the total cost of financing per year plus fees and interest accrued.

Let’s look at an example:

  • Cost of car: $12,000
  • Loan term: 48 months
  • Interest rate: 5 percent
  • Prepaid finance charges: $200
  • APR: 5.84 percent
  • Monthly payment: $280.96

Overall, you’re borrowing $12,200 at a five percent interest rate, but you’re paying 5.84 percent interest every year to the lender for financing the car. In the end, both percentages will give you the same monthly payment amount. The main reason why you see both an APR and interest rate amount is so you can better understand your car loan and how you got to the monthly payment you qualified for.

Confused about the Car Buying Process?

If all this terminology and percentages have you confused, and you’re ready to finance a vehicle, let CarsDirect help out. We work with dealerships across America that have the lenders available to work with people who have unique credit challenges. Getting the process started is simple. Fill out our online auto loan request form, and we’ll get to work matching you with a local dealer!

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Megan Foukes is a recent graduate from Indiana University who graduated with a bachelor’s in journalism. Megan works as a content writer for Auto Credit Express and contributes to several automotive and finance blogs.


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