What Does APR Mean When Buying A Car?

By David

APR (annual percentage rate) is something we are all familiar with already from our everyday credit card usage. But what does APR mean when buying a car? The short answer is, exactly the same thing. However how it is all calculated, and what it can mean for your car payments is a bit different.

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How APR is determined

The APR on your car loan will be determined by a few different factors. The higher this number the more you will ultimately end up paying for your new car.

1)      Credit Score – The key determining factor for your car loan is going to be your credit score. The higher your credit score is the lower the APR will be on your car loan.

2)      Amount of Loan – As the amount of the loan increases so does the amount of work involved for the lender and the risk of default, thus increasing the APR to compensate

3)      Length of Loan – Like the amount, the longer the loan is for, the more work and risk is being taken on by the lender and thus the higher the borrower’s APR will be.

4)      Type of Car – The APR for a new car loan is typically a little lower than for that of a used car.

5)      Location – Sometimes where you are buying the car from has an impact on the APR that could be either positive or negative.

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How Payments Are Calculated

Your monthly payments are a combination of factors including how much was borrowed, how long it was borrowed for, and what your APR was. These factors interact to determine how much principle you will pay each month and how much interest.

Putting it all Together

So let us say that you decided to get a $25,000 new car from a local dealership. There are taxes and fees associated with this, but to avoid taking out more loan money you decided to pay these out of pocket meaning the loan is for just the $25,000. This amount is your principle.

After discussing options, you decide that a 60-month repayment plan is best for you. Since you have really good credit they go with and APR of just 5%. To figure your monthly payments for the first year you’ll multiply your APR with your principle (25,000*0.05=1,250) and then divide the results by 12 (the number of months in the year) (1,250/12=104.17). Now you will take your principle and divide it by the number of months you will be paying on the loan (25,000/60=416.67). Finally add your two results to determine your first year’s monthly payments (416.67+104.17=520.84).

Obviously the shorter the term of your loan the more you will pay each month, but the less you will end up paying in interest and vice versa.

Now, with the above information at your disposal you can be certain you are ready to start looking for that new car and using the calculations above or one of the calculators online, you can find a reasonable payment and avoid a surprise at the dealership.

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