If you’ve gone shopping for car loans, you’ve surely come across the term APR (Annual Percentage Rate). 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?
The APR 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.
This post tells you everything you need to know!
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 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 | 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 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.
- 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.
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 – 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.
FAQs
What is the average APR on a car loan?
The average APR of a car varies based on several factors, like your vehicle’s age and credit score. The basic rule is that the APR will be higher if you’ve got a lower credit score. For instance, the average APR in 2022 was 4.07% (new cars) and 8.62% (used cars). But it changed to 6.63% (new cars) and 11.38% (used cars) in 2023.
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 APR on a car loan with a credit score of 750?
If you have a credit score of 750 or above, the APR on a new car loan is currently 2.96%. The APR on a used car loan is 3.68%.
What is the difference between APR and interest rate on a car loan?
The APR considers the interest and borrowing rates, like the prepaid finance charges. It gives you a more precise estimate of how much you’ll pay to finance a vehicle over time. However, the interest rate is the percentage charged on the amount you borrowed from a lender. It doesn’t have any loan-related charges.
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 remaining in the payback term. Then multiply by 365 and again by 100.
What is the highest APR on a car loan?
APRs range from 5.07%-21.38% based on your credit score and the kind of auto loan you take.
What is the APR on a car loan with a 755 credit score?
If your credit score is 750 or above, the APR on a new car loan is presently 2.96%. The APR on a used car loan is 3.68%.
What is the average APR on a car loan with a 640?
For new car loans, it is around 12.84%. If you take a used car loan, the APR will be around 20.43%.
What is the average APR on a used car loan?
The average APR on a used car loan is around 11.38%.
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Renee is your go-to travel guru! With 15 years of wanderlust-fueled writing, she’s your go-to guide for all things travel and driving-related. When she’s not behind the wheel or jet-setting across the country, you’ll find her binge-watching movies/series or listening to true crime podcasts.
