How to Calculate APR on a Car Loan

APR is the total cost of borrowing money for your car loan, expressed as an annual percentage. It includes the interest rate, plus other fees and charges associated with obtaining a car loan. The APR helps consumers compare different loans by providing a standardized evaluation of their costs. You pay less in interest for your loan with a lower APR. 

Many people often confuse APR with the interest rate, but these terms represent different car loan aspects. While both are crucial in determining the cost of borrowing money, they should be considered separately when evaluating auto loan offers.

The interest rate is the percentage a lender charges for lending you money without adding in fees or other expenses. In contrast, APR reflects the interest rate and additional costs, such as origination fees, documentation fees and processing charges.

If you just consider the interest rate alone, your monthly payments might seem low. Taking into account all associated expenses within the total could be a different story. That's why it's always crucial to compare loans using their respective APRs rather than just the average interest rates.

The calculation formula for calculating APR is not hard; you can do it manually or use an auto loan calculator.

How to manually calculate APR

Here are five steps to calculate APR manually: 

1. Determine the principal amount borrowed and total interest paid over the life of the loan.

2. Add any additional fees or charges associated with obtaining credit.

3. Divide this sum by the number of payments required to repay it in full.

4. Multiply this figure by twelve (the number of months in a year).

5. The result is your APR.

This is how it would look if calculated using a principal of $20,500: 

Comparing APRs can help you find a loan with lower total interest paid and better overall terms and conditions. 

1. Research multiple lenders - Gather information from various lending institutions such as banks, credit unions and directly from dealerships. Each lender may offer different interest rates and fees, affecting your auto loan's overall cost.

2. Analyze offers - Once you’ve collected several offers, note their respective APRs and any additional fees or charges included in each proposal.

3. Evaluate repayment terms - The more expensive cars have gotten, the longer the loan offers, which makes the payments smaller but raises the rates.

4. Negotiate for better deals - If possible, use competing offers as leverage when negotiating with potential lenders. They might be willing to match or even beat their competitors' rates if they know you're shopping around.

As a general rule, remember that credit score is important to the APR on your loan, so get your free credit report every year and make sure it's accurate. And don't forget to consider other factors such as customer service quality, the flexibility of repayment options and any potential prepayment penalties when choosing a lender for your car loan.

If you’re wondering why you’ve been quoted a certain APR, the following factors determine why. These factors help lenders assess the risk of lending money to borrowers and ensure they remain competitive: 

1. Credit score - Your credit score reflects your creditworthiness and ability to repay debts. Borrowers with better credit scores can expect lower rates, while those with poorer ones may have to contend with higher APRs due to greater risk. Find out what credit score you need to buy a car.
2. Debt-to-income ratio - Lenders want your car payment under 15% of your net monthly pay. They evaluate your debt-to-income ratio, which compares your monthly debt payments against your gross monthly income. A lower ratio indicates more disposable income for loan repayment, making you less risky from a lender's perspective. 
3. Loan term - The length of time you choose to repay the loan can also impact the APR. Shorter terms often come with lower interest rates but higher monthly payments. Meanwhile, longer terms result in smaller monthly payments but higher total interest paid over the course of the loan.
4. Type of vehicle - New cars typically have better financing options than used vehicles because they pose less risk for lenders due to their reliability and resale value.
5. Lender competition - Lending institutions compete for customers' business so they may offer varying APRs based on promotional offers or other incentives designed to attract borrowers.

The best way to settle on an APR that you’re happy with and that fits within your budget is to compare multiple lenders. However, there are alternatives to traditional car loans if you are unable to meet the lender’s requirements or are looking for more flexibility. 

Consider a car subscription. If you’ve always wanted to drive a Tesla or Cadillac, you can with a FINN car subscription. And if you get tired of it, need a different car to fit a lifestyle change, or just want to try another car, you can do so every 6 or 12 months. Rates include registration, insurance, roadside assistance and maintenance. Just choose a car online and it’ll be delivered directly to your doorstep.