Though most of us are familiar with what APR is from using credit cards, many of you may still be wondering “what does APR mean for cars?” To answer this question, we will take a look at exactly what APR is and how it will affect your next car loan.
If you are unfamiliar with APR, we must first get you up to speed before we can answer the question “what does APR mean for cars?” APR is an abbreviation for Annual Percentage Rate and as the name suggests it is the percent rate that you will pay on a loan each year. This term is used interchangeably with interest rate, so do not be confused by the different terms.
How it is determined
The next thing to know when pursuing an answer to the question “what does APR mean for cars?” is how your APR is determined when you apply for a car loan. This is typically based on a few different factors
1) Credit Score – the most influential criteria is going to be your credit score. The higher your score is, the more likely that you will be able to get a loan with a lower APR
2) Type of Car – the type of car you are getting (either new or used) will also affect your APR for the loan. Getting a loan for a new car will typically result in a lower APR than getting a loan for a used car assuming you are borrowing the same amount.
3) Amount & Duration – The amount you are borrowing and the length of time you are borrowing it for will have a big impact on your APR. The more you borrow and for longer, the higher your APR will typically be.
How it is calculated
Now that you know what your APR is and how loan issuers go about figuring out the appropriate rate for each individual, we can take a look at how your APR will be used to add interest to your loan. With a typical car loan, your interest will be applied once a year at the start of the year on the remaining balance of your loan and then divided up into twelve equal segments that you will pay with your principle each month. For example, let’s say you got a car loan for $30,000 that you intended to pay off in 36 months with an APR of 2%. Your first year monthly payments would be calculated by multiplying the outstanding balance of your loan, $30,000 in this case by your APR, which is 2% for this example. The equation will look like this: 30,000*0.02=600 and as you can see this yields a result of $600. Now divide this result by twelve: 600/12=50. Next divide your principle by the total number of months remaining on your loan which will look like this: 30,000/36=833.33. Finally add your two results together: 833.33+50=883.33 yielding a monthly payment of $883.33 for the first year.
Now that you know how APR works for cars, you are ready to start shopping for your perfect ride.