How to Calculate APR on a Car Loan?

Annual Percentage Rate (APR) is the cost of borrowing money, including fees, that you pay each year. Interest rate is the cost of borrowing money yearly. Both are expressed as a percentage. However, while APR includes fees or other charges such as closing costs, mortgage insurance, loan origination fees, and discount points, the  interest rate does not include any loan fees.

So, how do you calculate the APR of a car loan, and how does it work? Read on to find out. We’ll also cover what the ideal APR on a car loan should be, as well as how you can get better interest rates.

What Is APR on a Car Loan?

Like interest, the APR is also expressed as a percentage, but while the interest does not include other loan fees, the APR does.

What Is a Normal APR For a Car?

If you’re in excellent credit standing, the car loan APR for a new car is around 4.96%. However, if you have bad credit, the average car loan APR for a new car is around 18.21%.

What Is a Good APR on a Car Loan?

So, what would be a good APR for my current score and for the car I want? If your credit score is excellent or at least 750, the average car loan rates for a used car is 5.32% and 5.07 for a brand new car. If your credit score falls between 700 and 749, which is considered good, the average car loan rates for a used car is 6.27%, and 6.02 for a new car.

How Does APR Work on a Car Loan?

As mentioned, the APR is the annual cost of a car loan, or any other type of loan, for that matter. It is expressed as a percentage of your total debt, and includes all charges and fees, including interest that you pay every year.

To determine your APR, multiply the interest rate by 12 months. Let’s say your loan interest rate is 4%. Multiply .04 x 12, and you’ll get an APR of 4.8%.

How Do Dealerships Determine APR?

The car loan interest may vary, depending on several factors that all have a bearing on the APR computation. These include the credit history, financed amount, age of collateral, length of time, down payment, and the car itself. The higher your credit standing, the more preferential the interest rate will be.

How to Calculate APR on a Car Loan:

Knowing how to determine the car loan APR comes in handy when weighing different financing options, although federal law requires disclosure of the APR, as well as the other loan terms from lenders before the debtor signs the contract. Having said that, it is still beneficial to know the APR in advance. This way, you can tell if the loan fits your financial goals and budget.

Here’s a step-by-step guide on how to calculate your car loan APR:

  1. Sum up the interest, taxes, financing fees, and all other loan-related charges you need to pay throughout the loan term.
  2. Divide the sum by the total loan amount. The quotient is the rate of all fees over the amount of loan in decimal.
  3. Divide the quotient by the duration of the loan expressed in days. You will get the daily average.
  4. Multiply the daily average by 365 to get the annual average in decimal.
  5. To get the APR, convert the decimal to percentage by multiplying it by 100.

To calculate for the APR, first sum up all loan charges including interest, then divide it by the loan amount. Divide the result by the loan term in days to get the daily average, then multiply it by 365. Finally, multiply it by 100 to arrive at the APR.

What APR Is Too High for a Car?

If the car loan carries a higher than average interest rate, the APR is typically “high”, with all other charges being equal. While 16% is the limit set by law, some unscrupulous lenders charge 25% and higher.

Can You Reduce APR on a Car Loan?

Through car loan refinancing, you can lower your APR by as much as 2.4%. The figure may seem insignificant at first. But if you consider its impact, for instance, on a vehicle worth $35,000 with a 60-month term, it easily translates to a savings of over $2,500 over 60 months.

How to Get Lower Interest Rate on Car Loan:

Of course, you want to get a low APR to enjoy lower monthly payments. Who doesn’t? Just follow the tips we prepared below, and you’re on your way to getting preferred interest rates.

#1 - Keep your credit in good standing.

Regularly check your credit score, and clear all outstanding debts in your record. If you're planning to avail of a loan in the near future, make sure that your payment history for the past 6 months is consistently good. This way, you can enjoy a few points increase in your credit score, allowing you to get a lower APR. Note that free credit reports are free from most credit bureaus once a year.

To lower the APR on your existing car loan, you can refinance to a longer term, lower APR, or if possible, both. If you have a high credit rating, you can negotiate for a few points reduction in your existing APR. This translates to a yearly savings of a few hundred bucks.

#3 - Do a comparison shopping on car refinance rates.

You can find flexible lenders and better rates through online car loan and refinancing aggregators such as where you can compare APRs, loan terms, and other conditions. You can even use an online auto loan refinancing calculator to have an idea of how much savings you can expect before actually doing your shopping.

#4 - Request someone you trust to co-borrow or co-sign for you.

If you feel you don’t have a high enough credit score to get a low APR, you can always bolster your credit by having a co-signer or co-borrower in good credit standing. Because the risk will be shared between two parties, lenders may offer a lower APR than when you’re carrying the risk alone. The lender may run after the co-borrower in case you miss or default on your loan payments.

#5 - Negotiate for a lower APR with your lender.

If you think the APR offers you’re getting are not fair enough, you can always try negotiating with the lender for a more preferable APR. Lenders are usually open for negotiation, but only with borrowers who have moderately good or excellent credit ratings. So, if you have a poor credit score, this may not be an option for you.

#6 - Consider getting loans with shorter terms.

If you’re worried about paying high interest on your car loan, you can opt for a loan with shorter payment terms, say 24 to 36 months. However, shorter-term loans require higher monthly payments. Go for it if you can afford to pay more monthly.

To get a lower interest on your car loan, make sure to maintain a good credit standing. If possible, refinance your existing loan. Doing comparison shopping before signing up may also help, as well as having a co-borrower or co-signer. Another option if you are in good credit standing is to negotiate with the lender, and if you can afford high monthly payments, opt for loans with shorter terms, but with lower interest.

Final Verdict

High interest and APR are favorable to lenders, but as a car buyer, you would always prefer low interest rates and APRs. This will allow you to save money on your car purchase.

There are ways on how you can avoid high APRs and get offers for better rates – even if you do not have excellent credit. Just follow the tips we provided in this post.

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