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What Is APR On A Car Loan and How Is It Calculated?

  • Auto Refinance
  • Renee Martin
  • 8 minutes

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If you’ve gone shopping for car loans, you’ve surely come across the term APR. And while you may know it’s some form of interest rate, what exactly is APR on a car loan, how is it calculated, and how different is it from a regular interest rate? This post tells you everything you need to know!

The APR, or Annual Percentage Rate, is probably the most important number you need to keep an eye out when borrowing from a lender – even more than the loan amount! That’s because even a small percentage point difference can translate into thousands of dollars either saved or lost. However, there is often confusion regarding what is included in the APR, what the best APR is for a certain credit score, and how to calculate it.

In this post, we discuss everything you need to know about it.

  Sign showing 'Best Rates' outside a dealership

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 Рincluding fees and interest charges Рexpressed 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 Рlike 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 Is the Difference between APR on a Car Loan and 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.

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 on 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 downpayment could help you get lower APRs.
  • Loan-to-value ratio: Important if you’re looking to refinance your vehicle. LTV ratio indicated whether you care “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 are included in the APR.¬†

Average Auto Loan APRs for Different Credit Scores

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         6.33%          6.58%                3.38%   
      700-749         10.64%        10.89%                4.32%   
     600-699         14.27%        14.52%                6.74%   
    451-599         17.52%         17.77%                 9.39%   
    450 or lower          Not Applicable (N/A)           N/A                  N/A   

*As of March 2022  

Thinking woman at the wheel of her car

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 below formula:

  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.

  1. 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.
  2. 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
  3. 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.
  4. Negotiate the APR with the lender: It is possible to renegotiate and lower your existing APR Рas long as you have been regular in payments.

What is APR on a car loan and how is it calculated?

How Can I Lower My APR with Way.com? 

If you’re someone who’s already paying for a car loan with a high APR, auto refinancing with Way.com is a great way to lower your APR and save money in the long term. The best part is that you needn’t go searching for the best deals to lower APRs – you have them all on one platform! By just inputting some initial loan details, Way.com will show you multiple lenders willing to refinance your auto loan.

Simply head over to the Way.com Refinance section and use the auto loan calculator to find out how much you can save. Then, compare offers from several of our partners and choose the refinance offer that most appeals to you. 

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.

However, renegotiating a car loan with the dealer might have a low chance of success as he might already have sold the loan to another financial investor. Also, paying off your loan immediately is an expensive proposition that is not accessible to everyone.

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 Рit 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 anything below that can be considered a great deal.


Read more blogs for info on finding top-rated airport parking, the best parking spots in your city, and affordable car washes near you. 


 

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