How Does APR On A Car Loan Work?

If you intend to finance your car or already have, then its best you understand how APR on a car loan work in order to have a fair idea of what your loan entails. Lots of people usually confuse APR and interest rates to mean the same thing. However, they are not and I’m going to explain in details how APR on a car loan work.

The excitement of getting a new car can make one take hasty decisions that usually have dire consequences hence you must ensure that you do all the necessary research before going for a car loan. There are a number of terms you will hear in auto finance that you need to know about and one of such is the Annual Percentage Rate (APR).

What Is an APR?

APR is an acronym for Annual Percentage Rate which is the rate of your loan each year including all other fees that comes with the loan. It is often expressed in percentages similar to interest rate. However, whereas an APR is how much your loan will cost each year which includes some other fees, an interest rate does not have any fees added to it.

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What Does APR On A Car Loan Mean?

Unlike loans from friends and families that usually do not come at any cost, all other loans come at a cost including car loans. Lenders give out loans to a customers at a cost and that cost is usually what they term APR which includes all other fees that is connected to the loan.

So as long as it’s car loans you’ll be using to purchase your car, then know that you will be charged interest.The higher the APR, the higher the cost of your loan and the lower the APR the lower the cost.

Hence as a borrower, you would want to be getting a favorable APR that wouldn’t increase the cost of your loan too much. So the best advise I can give you is to shop around!!. Enquire from two or more lenders to find out what their APR is, compare their rates before you decide on which lender to borrow from.

Ordinarily, at least 8/10 borrowers will want to go in for lenders with a lower APR and I’m guessing that includes you.

But one may ask, what is the best APR for a car loan? Well, the answer is quite simple and I’ll tell you why.

What APR Is Best For Me?

The best APR should be one that is on the low side. The APR set by lenders for borrowers varies from customer to customer because no two clients are the same. Every customer has his or her unique situation hence it is very unlikely to find two people with the same APR, although it does happens.

The APR for a borrower is calculated taking into consideration several factors specific to the customer. Therefore, I can’t give you a definite APR for everyone.

However, by comparing the rates of at least two or more lenders, you get to know which one is best for you.

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What Are Some Of The Things That Are Considered When Calculating APR? 

Some of the things lenders look at when calculating APR on a car loan includes the following;

Credit Score/ Credit Worthiness 

I’m sure by now you know the importance of a credit score when applying for car loans. It is one of the first factors that are considered by lenders and rightly so as it helps them to determine how risky a loan is or the credit worthiness of a borrower.

A good credit score helps you get a relatively better APR as compared to a bad credit score. Additionally, how long it took you to pay back a previous loan may impact the rate you get as APR. If you have a good credit, then you stand a chance of getting a lower APR as compared to one with a bad credit history.

Type of Car (New/Used)

This also plays  critical role when calculating APR. Lenders will take into consideration the age of the car; whether it is a new car or a used one.

Generally, a used car has a higher APR than a brand new one.

Loan Duration

How long you want to spread out repayment of your loan is also factored when calculating APR. Normally, alot of borrowers will want to go for a longer term loans in order to make lower monthly payments.

However it is not always the best idea as it results in pegging your APR higher than it would have been if you went for a shorter term.

Down Payment 

The amount you pay as down payment also plays a role in calculating APR. The higher the amount of down payment you make, the more likelier you are to get a lower APR and vice versa.

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