APR stands for annual percentage rate. This is the interest rate that you’ll pay on your car loan, expressed as an annualized number. For example, if you have a 5% interest rate and finance $10,000 over 60 months at that rate, you will pay an additional $1,200 in interest over the life of the loan. Check below how calculating your car payment with APR matters:
What is APR?
APR stands for annual percentage rate. APR is a calculation of the total cost you will pay on a loan over time, including interest and principal.
It’s important to know your APR because it gives you an accurate picture of how much money you will pay back in the long run if you take out a loan (or if you plan to refinance). A lower APR means that it costs less money—in other words, less interest—to borrow money from these lenders over time.
As Lantern by SoFi professionals say, “APR is a better metric for gauging the cost of borrowing than interest rate alone.”
This blog provides general information about how to calculate your car’s APR and how different factors affect it.
What’s the difference between interest rate and annual percentage rate?
APR and interest rate are related, but they’re not the same. APR is a more accurate representation of your overall cost to borrow money.
The interest rate is the cost of borrowing money—it tells you how much you’ll pay in interest for borrowing money from a bank or credit union.
The annual percentage rate (APR) is the total cost of borrowing money—it includes all fees and interest, not just the interest rate
How can you calculate your Car’s APR?
To calculate your car’s APR, you need to know three things: the interest rate, the length of the loan and how much you’re paying each month. The simple formula is:
APR = Interest Rate x Number of Years
So if you have a 5% interest rate and a 36-month loan at $1,000 per month, your APR would be 0.18%. If you want to use an online calculator to find out what your car’s APR is, there are several options available online.
How does APR affect a car loan?
APR affects the total cost of a car loan in several ways. APR is an annual interest rate, which means that it’s applied to your entire outstanding balance every year. It’s also typically applied to all your monthly payments. So if you have an APR of 4%, and you borrow $10,000 at 7% fixed for 60 months, here’s what happens:
- The total amount paid over the life of the loan increases (by 3%) because more money is being charged as interest each month
- The monthly payment decreases by over 5% since fewer dollars are required to pay off a smaller amount of principal
APR is an important tool for comparing loans, but it’s not the only one. You can also use your lender’s terms, such as the number of years and how much you pay each month. So when you go shopping for a car loan, make sure to do some research on different lenders—and don’t forget about APR!
