When it comes to car loans, many words are used, and some of them are often taken to mean the same thing. In many cases, people use the terms interest rate and annual percentage rate of charge (APR) interchangeably, but they are not the same thing. Although these are similar number calculations, there is one key difference that you may not be aware of.
The difference between interest rate and APR
An interest rate is how much it costs you to borrow money, expressed as a percentage. It does not include taxes, fees or additional charges on your loan. The APR, or annual percentage rate, is what it costs you to borrow money for the whole year on your car loan, including extras, taxes, and fees. It is also expressed as a percentage. The higher your APR, the more you pay for your loan overall.
If you’re trying to figure out how much you should pay in interest charges, it’s a good idea to look at your APR. This is a more accurate description of the amount you pay to finance a vehicle.
What goes into the cost of a car loan
Most people, regardless of their credit rating, have to pay interest when they take out car loans or mortgages. To really understand how much you’re paying in interest and why, you need to know the basics of an automatic formula.
- Director – On an auto loan, interest accrues daily based on the principal balance of your loan. The principal is the amount you borrow and agree to repay to buy a car. It includes the purchase price of the vehicle as well as all fees, taxes and additional charges incorporated into the loan.
- Interest rate – How much does it cost you to borrow the principal, expressed as a percentage. The average interest rate for bad borrowers among our dealer network is around 13%, although your interest rate will depend on your specific situation and the lender you work with.
- Interest charges – These accumulate daily based on your current loan balance. Less accumulates after each payment. The fastest way to save money in interest charges is to reduce your principal as much as you can, as fast as you can.
- APR – The amount you are charged on your loan for the whole year, based on the total loan amount, including all fees and extras.
Although you can calculate your APR yourself, you shouldn’t have to. It’s in your auto loan agreement, and if it’s not, you shouldn’t sign it. If you don’t know what the APR of your car loan is, you can also contact your lender. They are required to tell you what your rate is under the Truth in Lending Act (TILA). You can also use online tools to help you find your estimated APR if you’re just in the buying stages of the auto loan process.
If you’re trying to choose between two different loans, all else being equal, a lower APR saves you money overall.
Get a lower APR
Although some borrowers with exceptional credit may sometimes qualify for a 0% interest rate, your credit score generally influences the rate you are assigned. The lower your credit score, the higher the interest rate you are likely to get. The current national interest rate, called the prime rate, can also play a role in whether interest rates are high or low in general.
A good way to qualify for a lower APR on your next car loan is to work on building your credit. There are several ways to do this quite easily, such as cleaning up your credit reports, reducing your credit card balances, or paying all your bills on time.
In some cases, you can negotiate your rate with a lender or pay a larger down payment to help you qualify for a better rate. The more money you can deposit, the less you borrow, so there is less principal for interest to accrue. You can also opt for a shorter loan term or a newer vehicle model, both of which can affect the interest rate you are offered.
Researching rates is another way to make sure you’re getting the best possible deal for your situation. It’s not always the easiest when you have bad credit, and you may have to choose between rates that are all higher than the average. To find the rates you may be eligible for from different lenders, it is important that you apply for several loans of the same type within the rate shopping window – usually around 14 days. By applying to a few lenders of the same type within 14 days, a single blow has an impact on your credit score.
Ready to start?
The APR and the interest rate are very similar, but they are not identical. When shopping for an auto loan, your APR is the number to pay attention to because it tells you how much you can expect to pay to finance a vehicle. If you’re not sure where to start your car buying journey, look no further.
To Auto Express Credit, we have been matching consumers in credit difficulty with local dealerships who have loan opportunities with bad credit for over two decades. Now we want to help you get the auto loan you’re looking for without having to search for a dealership that might not be right for you. Instead, let’s do the heavy lifting. All you need to do to get the process started is complete our no-obligation car loan application form, and we’ll get you started!