APR on Car Loans: Everything You Must Know

When it comes to car loans, there’s a lot to know. For one, what is APR on a car loan? How does it compare to other loan types?

And how can you calculate APR on a car loan? Here’s everything you need to know.

What is APR on a car loan?

According to Lantern by SoFi, APR, which stands for annual percentage rate, is the yearly interest rate on a loan. It’s used to calculate how much you’ll pay in finance charges when borrowing money. The higher the APR, the more you’ll pay over time.

Why is APR important?

The APR gives borrowers an estimate of what their repayment terms will look like. It’s more accurate than the nominal rate, which doesn’t calculate how much you’ll owe or how long it takes to repay your loan.

In addition to being a good measure of the cost of borrowing money, the APR also helps you compare loan offers from different lenders.

Specifically, some car dealers calculate APR differently than others, so you must determine how your dealer calculates this number before signing on the dotted line.

When looking at car loans, it’s crucial to consider whether you’re buying new or used, what the down payment is, and for how many years you’re taking out your loan. You should also calculate how much you can afford to pay back monthly and do the math to calculate an approximate APR.

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What is the average APR range for a car loan?

On average, expect to pay between 6% and 13%. However, if you’re paying in cash or securing the payment with property (which is rare), you’ll pay a much lower APR.

In addition, if you have poor credit, your APR will also be higher than average.

Key factors in how the APR is calculated for a car

The following are the primary considerations when calculating APR on a car loan.

1. Term of loan

Typically, the longer your repayment period, the lower your per-month payments will be and the more you’ll pay overall. Thus, it makes sense that a 60-month loan has a higher APR than a 36-month loan.

2. Down payment

The down payment plays a critical role in how your interest is calculated. The more you pay upfront, the less overall interest you’ll pay to make up for that initial investment. If you don’t put at least 20% down, you’ll have to pay a higher APR.

3. Credit score

A credit score will play a role in how much interest you’re charged on your car loan, but it’s important to note that having a decent credit score doesn’t automatically mean you’ll get the best APR. Loans with high-interest rates often go to those with poor credit.

How to calculate APR on a car loan

First, calculate how much you can afford per month.

Then, calculate your approximate APR using the formula; F = P(r/n) (nt) + I, where:

F= total finance charges

P= price of the item being purchased (the price of the car)

r= annual nominal interest rate (10%)

n= number of payments per year

t= total number of payments or term for the finance agreement (60 months, the typical length for a car loan)

I= annual finance charge expressed as a percentage of the total finance charges (0.5% of the total finance charges, or 0.005)

In conclusion, if you’re borrowing money to purchase a car, it’s wise to calculate your APR on the loan before signing any papers. Knowing how much interest you’ll pay can help determine if that loan is really in your best interest. Once you know your APR, calculate what this means for your monthly payments and compare it to other loans available, so you find the best possible deal.