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Everything You Need to Know about APR for a Car Loan

Car loans are popular credit products that most people end up securing throughout their lifetime. Before you take the plunge into getting a new auto loan, it’s imperative that you fully understand all the aspects that go into determining the terms of your loan. Today, we’re going to focus on everything you need to know about your car loan APR.

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What Does APR For a Car Loan Mean?

One term that you’ll really want to familiarize yourself with is APR. According to Lantern by SoFi, “APR is the total annual cost to borrow money, including interest and fees, represented as a percentage.” Your APR, or interest rate, is going to be the determining factor in how much you end up paying to borrow the funds for your new or used vehicle purchase.

Why is APR Important?

The reason that APR is exceedingly important on your car loan is that it can drastically alter the amount you have to pay every month and over the term of your loan. Understanding how imperative this aspect of your loan is can be easily done by providing a great example.

Let’s say you’re taking out a $10,000 vehicle loan. You have two loan offers, one with 3% APR and the second with 5% APR. Over the life of the 3% loan, you’ll pay $3,000 in interest expenses. For the 5% loan, you’ll pay $5,000 in interest. That’s a $2,000 difference in the overall price of these loans. Suddenly, it becomes overly clear why APR is a necessary factor to examine with any potential auto loan.

What is the Average APR Range For a Car Loan?

The average APR for an auto loan is going to vary depending on your credit rating. Those with excellent credit scores can typically obtain an auto loan with an APR between 3 and 5%. Those with okay credit scores will be offered a usual APR between 6 and 10%. Those with bad credit can expect APR rates between 11 and 15%.

Factors Used to Determine Rates

The most obvious factor that is going to determine the APR that you receive for a car loan is your credit score. Those with high credit scores are seen as low-risk for lenders. Financial institutions are more likely to give lower interest rates to borrowers who provide the least amount of risk. Some other factors utilized to determine your loan APR include the term length, down payment amount, condition of the vehicle, your income, and so forth.

How Do I Calculate APR For a Car Loan?

Calculating your APR for any car loan is super simple when you have a mathematical formula. In this case, the formula is:

APR=[{(Interest + Fees / Principal) / Term} * 365] * 100

Once you have the necessary information, like your interest and principal amounts, you can simply plop them into the formula above to determine your APR.

Car Loan APR Versus Interest Rate

As you start to learn how to calculate apr for a car loan, you may be a little confused at the difference between APR and your interest rate. The interest rate is expressed in a percentage format and is a percentage of the principal balance. The APR rate includes the interest rate, fees, and additional costs of borrowing money. APR is a more accurate representation of what you’ll owe for the entire loan.

Before committing to any car loan, it’s imperative that you understand the specifics of the loan. APR is one of those aspects that takes some explaining to fully understand so that you can ensure it’s a favorable amount for your individual loan offerings.

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