Are Auto Loan Interest Rates and APR the Same?


When it comes to auto loans, there are a lot of words going around, and some of them are often meant to mean the same thing. In many cases, people use the terms interest rate and annual percentage rate (APR) interchangeably, but they are not the same thing. While they are both calculations of similar numbers, there is one key difference you may not be aware of.

The difference between the interest rate and the APR

An interest rate is the amount it costs you to borrow money, expressed as a percentage. It does not include any taxes, fees, or additional charges on your loan. The APR, or Annual Percentage Rate, is what it costs you to borrow money for the entire year on your car loan, including extras, taxes, and fees. It is also expressed as a percentage. The higher your APR, the more you pay overall for your loan.

If you’re trying to figure out how much you owe in interest charges overall, it’s a good idea to look at your APR. It is a more accurate description of the amount you pay to finance a vehicle.

What goes into the cost of an auto loan

Most people, regardless of their credit rating, have to pay interest when they take out car loans or mortgages. To really understand how much you are paying in interest and why, you need to know the basics of an automobile formula.

  • Main – On a car loan, interest accrues daily based on your loan principal balance. Principal is the amount you borrow and agree to pay back to buy a car. It includes the purchase price of the vehicle as well as all additional fees, taxes and fees included in the loan.
  • Interest rate – How much it costs you to borrow the capital, expressed as a percentage. The average interest rate for bad credit borrowers across our dealer network is around 13%, although your interest rate will depend on your specific situation and the lender you are working with.
  • Interest charges – These accumulate daily based on your current loan balance. Less accumulates after each payment. The fastest way to save money on interest charges is to reduce your principal as much as you can, as quickly as possible.
  • APR – The amount you are charged on your loan for the entire year, based on the total loan amount including all fees and extras.

Although you can calculate your APR yourself, you shouldn’t need to. It’s stated in your auto loan agreement, and if it isn’t, you shouldn’t sign. If you don’t know what the APR for your auto loan is, you can also contact your lender. They are required to tell you what your rate is by the Truth in Lending Act (TILA). You can also use online tools to help you find your estimated APR if you’re just in the buying stages of the car loan process.

If you’re trying to choose between two different loans, all other things being equal, a lower APR saves you money overall.

Get a lower APR

Although some borrowers with exceptional credit can sometimes benefit from an interest rate of 0%, your credit score generally influences the rate assigned to you. The lower your credit score, the higher the interest rate you are likely to earn. The current national interest rate, called the prime rate, can also play a role in how high or low interest rates in general are.

A good way to qualify for a lower APR on your next car loan is to work on building up your credit. There are several ways you can do this quite easily, such as cleaning up your credit reports, reducing your credit card balances, or making all of your bill payments on time.

In some cases, you can negotiate your rate with a lender or make a larger down payment to help you get a better rate. The more money you can put in, the less you borrow, so there is less interest capital to accumulate. You can also opt for a shorter loan term or a newer vehicle, both of which can affect the interest rate you are offered.

Shopping for rates is another way to make sure you’re getting the best deal possible for your situation. It’s not always the easiest when you have bad credit, and you will likely have to choose between above-average rates. To find the rates you might qualify for with different lenders, it’s important that you apply for multiple loans of the same type within the rate purchase window – usually around 14 days. By applying to a few lenders of the same type within 14 days, one hard blow impacts your credit score.

Ready to start?

APR and interest rate are very similar, but they are not the same. When shopping for a car loan, your APR is the number to watch out for because it shows you how much you can expect to pay to finance a vehicle. If you don’t know where to start on your car buying journey, look no further.

AT Auto Express CreditWe match credit-distressed consumers with local dealers who have had bad credit loan opportunities for over two decades. Now we want to help you get the auto loan you are looking for without having to search for a dealership that might not be right for you. Instead, let us do the heavy lifting. All you need to do to start the process is complete our No-Obligation Car Loan Application Form, and we’ll get the ball rolling for you!


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