When it comes to auto loans, a lot of words are thrown around, and some are often thought to mean the same thing. In many cases, people use the terms interest and annual percentage (APR) interchangeably, but they are not the same. While they are both calculations of similar numbers, there is one important difference that you may not be aware of.
The difference between interest rate and APR
An interest rate is how much it costs you to borrow money, expressed as a percentage. It does not include taxes, fees or additional costs for your loan. APR, or annual percentage, is what it will cost you to borrow money on your car loan throughout the year, including extras, taxes, and fees. It is also expressed as a percentage. The higher your APR, the more in total you will pay for your loan.
If you want to find out how much you have to pay in interest expense in general, that’s a good idea look at your APRIt is a more accurate representation of how much you will pay to finance a vehicle.
What goes into the cost of a car loan?
Most people, regardless of their creditworthiness, have to pay interest when taking out things like auto loans or mortgages. To really understand how much you pay in interest and why, you need to know the basic parts of an automatic formula.
- Client – Interest accrues daily on a car loan based on the principal balance of your loan. Principal is the amount you borrow and pay off to buy a car. It includes the purchase price of the vehicle plus any additional costs, taxes, and fees that are included in the loan.
- Interest – How much it will cost you to borrow the principal, expressed as a percentage. However, the average interest rate for borrowers with bad credit in our dealer network is around 13% your interest rate depends on your specific situation and the lender you work with.
- Interest charges – These are accrued daily based on your current loan balance. Less accrues after each payment. The fastest way to save money on interest expense is to reduce your principal as soon as possible.
- APR – The amount that you settle on your loan throughout the year, based on the total loan amount including all costs and extras.
While you can calculate your APR yourself, you don’t have to. It’s stated on your car loan contract, and if not, don’t sign it. If you are unsure of your auto loan APR, you can also contact your lender. They are required to tell you what your rate is under the Truth in Lending Act (TILA). You can also use online tools to help you find your estimated APR if you’re just getting into the shopping stages of the car loan process
If you’re trying to choose between two different loans, all things being equal, a lower APR will generally save you money.
Get a lower APR
While some borrowers with great credit may occasionally qualify for a 0% interest rate, your credit score usually affects the rate you are assigned. The lower your credit score, the higher the interest rate you are likely to get. The current national interest rate, the so-called prime rate, can also play a role in how high or low the interest rate is in general.
A great way to qualify for a lower APR on your next car loan is to work on building your credit. There are several ways you can do this fairly easily, such as cleaning your credit reports, reducing your credit card balances, or paying all your bills on time.
In some cases, you can negotiate your rate with a lender or submit a larger deposit to help you qualify for a better rate. The more money you can put down, the less you borrow, so there is less principal on which to accrue interest. You can also opt for a shorter loan term or a newer vehicle model, both of which can affect the interest rate offered to you.
Rate shopping is another way to make sure you’re getting the best deal for your situation. It’s not always the easiest when you have bad credit, and you will likely have to choose between rates that are all higher than average. To find the rates you might qualify for with different lenders, it’s important that you apply for multiple loans of the same kind within the rate shopping window – usually around 14 days. By applying to a few lenders of the same type within 14 days, just one hard pull will affect your credit score.
Ready to get started?
APR and interest rate are very similar, but they are not the same. When looking for a car loan, your APR is the number to look out for as it shows you how much you can expect to pay to finance a vehicle. If you are not sure where to start your car buying journey, look no further.
Bee Auto Credit Express, we have been matching consumers with a credit problem to the local dealers who have bad credit options for over two decades. Now we want to help you get the car loan you are looking for without the hassle of looking for a dealer who may not be right for your situation. Instead, let’s do the heavy lifting. All you need to do to get the process started is fill in our no-obligation information application form for car loan, and we’ll get the ball rolling for you!
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