This is part of Automotive Buyers Glossary Series Break down all the terms you need to know if you buy a new one or old car from one authorized dealer.
The annual percentage rate, or APR, is pretty easy to understand — and that’s good news, because there’s a lot more to think about when it comes to buy a new car. So we’re going to try to make this short and nice so you can find out what you need and then spend your precious time shopping for a car.
Auto loans, as you probably know, have an interest rate. Generally on a new car loan it’s a fixed rate. So you’ll apply for a loan, the lender will check your credit score and history, and offer you an interest rate – that’s how much you’ll have to pay to borrow over the term ( loan period), expressed as a percentage.
An APR is something the government requires lenders to provide as part of the Truth Lending Act of 1968. By law, the APR must include a number of fees and charges that are part of the loan initiation but will is not clear just looking at raw interest rates. It’s aimed at consumer protection, and we think it does and is a great way to compare loans.
The APR takes the interest rate and any fees associated with the loan – essentially, the total cost of borrowing, over the life of the loan – and then averages it out as a percentage annually. That percentage allows you to compare loans against each other and work out how much each will pay you each year.
Here’s another way to think about it: while there can be differences between loans due to the interest rates or fees involved, the APR is a bold comparison of the total cost of a loan.
That’s it! Use the APR to help shop for the best possible rate, considering the total cost of the loan. Happy shopping.
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