If you’ve been on the hunt for a car loan, you’ve probably heard the term APR (Annual Percentage Rate) thrown around. But what does it actually mean when it comes to car loans? How is it determined? And how does it compare to a standard interest rate? Let’s break down how APR works on a car loan in a way that’s easy to understand!
The APR is the most important number to watch when you borrow money from a lender, even more than the loan amount. A small difference in percentage points can mean saving or losing thousands of dollars. However, many people are confused about what the APR includes, what the best APR is for different credit scores, and how to calculate it.
What is the difference between APR on a car loan and the interest rate?
A car loan interest rate is how much you pay every year as a percentage of the principal (the amount borrowed), while APR also includes other additional charges and costs of borrowing money.
The APR is typically higher than the interest rate. It may include some of the following charges/fees:
- Dealership Fees
- Origination Fees
- Discount Points
- Rebates
- Processing Fees
Because it is inclusive of these charges, APR is a much better metric to gauge how much you will pay on the car loan.
What is APR (Annual Percentage Rate) on a car loan?
The Annual Percentage Rate (APR) is the cost of borrowing a certain amount of money to purchase a vehicle – including fees and interest charges – expressed as a percentage. Typically, APRs are expressed as an annual rate.
While the actual amount you want to borrow to buy the car is called the principal, the lender will charge you a certain amount of interest on the principal, which is called the car loan interest rate. However, there are several additional fees and charges you may have to pay to actually get the vehicle on the road – like dealership fees, registration fees, etc.
Though it may seem unimportant, these cascading charges can often add a few hundred dollars or more to the loan amount – thereby increasing your monthly payments. That’s why it’s important to know the total APR charged for your loan rather than just the base interest rate.
Why Is APR Important?
The APR is one of the two most important criteria you need to look out for when taking out a loan – the other being the loan term. The higher your APR, the more you will pay as interest charges over the loan term. APR is based on simple interest and does not account for the compounding of interest within a year.
What affects an APR for car loans?
Firstly, you should understand that there is no fixed APR rates. There would be a minimum rate and the rest is calculated based on a lot of factors. In addition to the interest rates, it includes the fees and other charges. The following are the factors that affect APR for car loans.
- Your credit score and credit history
- Down payment amount
- Term of your loan
- Your car’s age
- How long you’ve been in your current job
- Your income and expenses
What is the average APR range for a car loan?
The average APR range on a car loan is dependent on your credit score. However, the average rate would be above 4% for new cars. Here is the average APR range for a car loan as provided by Experian Information Solutions.
Average Auto Loan APRs for Different Credit Scores
| Credit Category | Credit score | Average APR, new car | Average APR, used car |
| Super prime | 781-850 | 4.77% | 7.67% |
| Prime | 661-780 | 6.40% | 9.95% |
| Nonprime | 601-660 | 9.59% | 14.46% |
| Subprime | 501-600 | 13.08% | 19.38% |
| Deep subprime | 300-500 | 15.75% | 21.81% |
Data source: Experian
How is my APR decided by lenders?
Different lenders use various criteria to decide on their range of APRs. They are required by law to declare the APR before you sign the contract. Some of the factors that go into deciding individual APRs include:
- Your credit score: Any score above 660 is considered good. Lower credit will result in higher APRs, some as high as 20-30%.
- Principal: The amount you want to borrow to buy the car. If you make a down payment, reduce that from the price of the car to arrive at the principal.
- Payment history: Lenders could charge you higher APRs if you have an inconsistent payment history.
- Down payment: Paying a higher down payment could help you get lower APRs.
- Loan-to-value ratio: Important if you’re looking to refinance your vehicle. LTV ratio indicates whether you are “upside-down” on your loan or not.
- Loan term: Choosing a longer term could mean paying more in interest charges.
- Other fees and taxes: The cost of origination fees and processing fees is included in the APR.
Why do average interest rates vary for new and used vehicles?
There is no single APR that can be considered “good,” since it varies according to each person’s financial background. However, keep the following average APRs for each credit score when shopping around for loans.
| Credit Score | New Car Loan APR | Used Car Loan APR | Refinance Car Loan APR |
| 750 or higher | 2.96% | 3.68% | 3.38% |
| 700-749 | 4.03% | 5.53% | 4.32% |
| 650-699 | 6.75% | 10.33% | 6.74% |
| 450-649 | 12.84% | 20.43% | 9.39% |
| 450 or lower | Not Applicable (N/A) | N/A | N/A |
How to find out your APR on a car loan
Calculating your APR is not a herculean task. Here is how to find out the APR for a car loan manually.
How to calculate APR on a car loan manually
If you know the principal amount, the loan term, and the monthly payment you are comfortable paying, you can easily calculate the best APR for a car loan from the formula below:
APR = [(I/P/T) x 365] x 100
where;
- P = the principal amount
- I = the total interest, taxes, and fees
- T = the total loan term in days
How can you calculate APR on a car loan quickly?
If you don’t have the time to sit and crunch the numbers manually, skip the hard work and use an online auto loan calculator to adjust the key parameters easily. By entering the loan term and monthly payment you’re comfortable with, you can find what APR will give you the best value in just a few minutes.
How to lower your car loan APR
Getting a low APR is not a question of negotiation with the dealership or lender AFTER applying for the loan. Since various financial factors go into determining your APR, it’s best to follow these general guidelines BEFORE applying.
- Maintain a good credit score: Ensure you have a spotless record for at least the previous 6 months before applying for a loan. This indicates to lenders that you are serious about financial discipline.
- Shop around and compare auto refinance rates: One way to reduce your existing APR is to refinance your car. You can do so with an online refinance aggregator like Way.com
- Apply with a co-borrower or add a co-signer: Lenders are likely to lower APRs if there is a co-borrower who guarantees payments.
- Negotiate the APR with the lender: It is possible to renegotiate and lower your existing APR, as long as you have been regular in payments.
Bottomline
APR represents the total cost of borrowing, including interest and fees, given as an annual percentage. It’s calculated by considering the loan amount, interest rate, and any additional charges over the loan term. By comparing APRs from different lenders, borrowers can make smarter choices and ensure they’re getting the best deal possible on their car loan.
More on APR
Can I Lower My Current APR without Refinancing?
It’s not easy to lower your existing car loan APR without refinancing. The only other options are to renegotiate a new APR with your lender or pay off the loan completely to avoid high payments in the future.
Should I Pay Off My Car Loan Early?
Though it is possible to pay off your loan early, it’s always best to check if your lender has any pre-payment penalties. You should only pay off your loan early if you feel that you will lose more money by paying the monthly installments.
What Is the Difference between APR and APY?
The main difference between Annual Percentage Rate (APR) and Annual Percentage Yield (APY) is that APR does not include the compounding of interest in a year – it is based on simple interest. On the other hand, APY is based on compounding and includes the interest on an asset every year.
What Does 1.9% APR Mean When Buying a Car?
An APR of 1.9% means you have got an excellent deal, and that you likely have an excellent credit and payment history. The average APR for a new car is 4-5%, so you can consider anything below that as a great deal.
What is a good APR on a car loan?
The good APR on a car loan depends on your credit score. For instance, you’ll get the best APR if you’ve got a credit score of 750 or above (Excellent).
What is the lowest APR on a car loan?
It depends largely on your credit score. You can expect an APR of 20% or more if you have no credit history.
What is the APR on a 96-month car loan?
Ideally, it comes to around 4.8%. However, the actual rate depends on factors like from whom you lend and your vehicle’s age.
What is the formula to calculate APR on a car loan?
First, add the loan fees and interest. Then, divide it by the principal and the remaining days in the payback term. Then multiply by 365 and again by 100.
Is 24% APR on a car bad?
Yes. It is a very high APR and not favorable for your financial health.
Is 5% APR a lot?
If the 5% APR is lower than the national average or close to it, it is not a high rate. So, 5% APR is not a lot.
Renée Martin is a travel and car expert who focuses on road and air travel in the U.S. For the past 6 years, she’s been helping make driving and trip planning easier and budget-friendly for everyday travelers.
