How Does APR Work on a Car Loan – Looking at Interest Rates for Car Loans
When you’re shopping for a new vehicle and planning to finance your purchase, it’s important to consider the total price, the length of the payment period, and the amount of your monthly payment. It’s also important to consider the annual percentage rate, or APR, on your auto loan because this rate determines how quickly you’ll be able to pay off your vehicle and how much interest you’ll pay on the loan over time. If you need a clearer understanding of what an APR is and how it can help you make a well-informed decision about financing your next car, truck, or SUV, read on to learn more.
What Is APR?
The APR, or annual percentage rate, is the amount it costs each year to borrow money for any kind of loan, including an auto loan. The APR includes interest, fees, and other charges that a borrower will pay each year, reflected as a percentage of the total debt. Much like lower interest, a loan with a lower APR is more desirable than a loan with a higher one if all other factors are equal.
Is APR the Same as Interest Rate?
When you’re looking for a loan or financing of any kind, you might wonder what the difference is between the interest rate and the APR. It’s true that there are some similarities between these concepts. For instance, they are both expressed in percentages and both indicate money that will be paid in addition to the principal amount borrowed. Also, both are calculated based on one year of payments. However, interest and APR refer to slightly different things.
The interest rate on a loan is a percentage that shows the basic cost a borrower agrees to pay in addition to paying down the principal during each year that they hold the debt. A loan’s APR, on the other hand, is more comprehensive. It includes the interest rate as well as other fees, points, closing costs, and charges that are distributed over the length of the loan. While both the interest rate and the APR influence the amount of monthly payments and the total amount a borrower will pay in addition to the principal after the loan has been paid off, the APR offers a clearer picture of the actual cost of the loan.
When you’re shopping for an auto loan and considering multiple lenders, it’s important to keep the difference between interest rate and APR in mind. Remember, APR is a more inclusive figure, so be sure to compare APRs to other APRs, and not to the interest rates of other loans.
What Is a Good APR for a Car Loan?
Since an auto loan’s APR helps you understand how much the financing will ultimately cost, it’s a good idea to get a broad understanding of annual percentage rates and how they relate to a borrower’s credit rating. When it comes to APR, lower is generally better. With a lower APR, more of your monthly payment goes directly toward paying down your loan and less is spent on financing. In addition to the amount of a loan and the length of the loan term, a loan’s APR is one of the most important factors in helping you determine whether a particular loan is a good fit for your situation.
If you’ve had a credit card or taken out any kind of loan before, you probably know that interest rates available to you are contingent upon many things. Some of these are related to your credit score and history, while others depend on broader economic trends that affect how financial institutions offer credit at a given time. Both of these aspects are usually in flux, so there are no hard-and-fast rules for what a good APR is. In general, if you’re looking for an auto loan, you should do some research to see what options are available and make an informed decision based on your choices.
Although it’s impossible to pinpoint the exact annual percentage rate a specific person might be offered, U.S. News & World Report provides the following average rates as of September 2020, based on borrowers’ credit scores and the type of financing they seek:
- Excellent credit score: For borrowers with credit scores of 750 or higher, the average rate is 5.07% for a new car loan, 5.32% for a used car loan, and 4.06% for refinancing.
- Good credit score: For borrowers with credit scores of 700-749, the average rate is 6.02% for a new car loan, 6.27% for a used car loan, and 4.65% for refinancing.
- Fair credit score: For borrowers with credit scores of 600-699, the average rate is 11.40% for a new car loan, 11.65% for a used car loan, and 7.15% for refinancing.
- Bad credit score: For borrowers with credit scores of 451-599, the average rate is 16.46% for a new car loan, 16.71% for a used car loan, and 12.49% for refinancing.
- Subprime credit score: Borrowers with credit scores below 450 may have difficulty accessing auto loans. If they do secure a loan, the interest rate and APR may be very high.
With these recent averages in mind, you can make an informed decision when financing your new or used vehicle.
Finding the Best Auto Loan for You
When shopping for an auto loan that will help get you into your next car, truck, or SUV, it’s critical to pay attention to the annual percentage rates. Along with other key factors like the overall loan amount, the monthly payment amount, and the length of the loan period, the APR will help you calculate the total amount you will pay for financing your vehicle.
Looking for a great deal and excellent financing options for your next vehicle? Sweeney Buick-GMC is ready to help. We pride ourselves on our service, and matching our customers with the vehicles they want is what we do best. Our finance department specializes in helping our customers get approved for the best financing available. Come by and check out our showroom today, or contact our friendly staff with any questions.