When it comes to taking out an auto loan, it’s important to have all your ducks in a row before signing on the dotted line. This means doing your homework on the important things that matter most to your monthly payments and overall bottom line.
At the top of this list is understanding exactly how your interest rate will affect your payment and the amount you owe over the life of the loan. Some lenders will quote you an interest rate but not mention APR. Or if they do mention APR, they leave it up to you to understand the difference.
While both of these terms relate to how much you will owe and pay, on your auto loan they are very different and you should fully understand them both to make sure you are getting the best deal on your next loan.
A loan's interest rate is the cost you pay each year to borrow money. The interest rate doesn’t include fees.
The interest rate you are approved for will vary depending on several factors such as your credit history, the value of the vehicle you want to finance, the amount you have to put down or other circumstances.
The lower the interest rate, the lower your monthly payment. Most consumers have an understanding of interest rates, but understanding APR can be a bit more confusing.
APR: Annual Percentage Rate
Put simply, APR is the annual cost of a loan to a borrower - including fees. Like an interest rate, the APR is expressed as a percentage. Unlike an interest rate, however, it includes other charges or fees. This number includes both the amount borrowed and any fees tacked on to that amount. The more fees included in your loan, the greater the difference there will be between your interest rate and the annual percentage rate. APRs are always calculated using simple interest, meaning that the higher the number, the more interest you’ll pay your lender.
APR is calculated using this formula:
1. Add total interest paid over the duration of the loan to any additional fees.
2. Divide by the amount of the loan.
3. Divide by the total number of days in the loan term.
4. Multiply by 365 to find annual rate.
5. Multiply by 100 to convert annual rate into a percentage.
The concept of APR may sound confusing at first, but it will be easier to understand when putting it into perspective. Let’s look at an example auto loan here to get started:
Let’s say you were approved for a $24,000 auto loan with a 5 year (60 month) term. The interest rate is set at 4.0%. Let’s assume that there are $500 in fees from the dealership. This means that your APR would be 4.84%, costing roughly $27,072.32 at the end of the loan term length.
At Best Reward, we don’t roll fees into our auto loans, so when a member is approved at a 4.00% interest rate, their APR is also 4.00% which translates to bigger savings. The same $24,000 auto loan with a 5-year (60 month) term would cost the borrower $26,518.03, not $27,072.32.
Explore Auto Financing Options with Best Reward
Even with detailed explanations, successfully charting the waters between APR and interest rate can be confusing. At Best Reward Federal Credit Union, we offer personalized, friendly service for all of your auto financing needs and encourage you to learn more about your options.
How Auto Loans Work