How to Calculate APR on a Car Loan
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What Is APR?
Calculating Your Car Loan’s APR
1. Gather Key Information
Principal: This is the amount of money borrowed. When you’re calculating APR, you can think of car loan principal as the price of the car minus your down payment and the value of a trade-in vehicle (if you did trade one in). Interest Rate: This represents the percentage charged on top of the principal each year. In your DIY calculation, this may be an estimated value. The best interest rate on a car loan can be as low as 0%. Loan Term: This is the length of the auto loan, usually expressed in months or years. You may want to learn more about the average car loan length. Fees: Any additional costs, such as origination fees, are factored into the APR, so you’ll need to know what those are, too. Taxes: Applicable state, county, and city sales taxes can be rolled into a car loan.
2. Run the APR Equation
I = Interest, taxes, and fees P = Principal T = Term (in days)
How Do Auto Lenders Calculate APR?
Down Payment: The amount of money you put down for an auto loan could help secure a lower interest rate, and thus, a lower APR. Trading in your old vehicle can be a convenient way to fund a car loan down payment. You can check online sites like CARFAX or Autotrader to get an estimate on your trade-in’s value. Vehicle Age and Condition: If you’re buying a used car, lenders can evaluate a car’s manufacture date, mileage, and general wear and tear when calculating APR. Typically, newer cars fetch lower rates than older vehicles. Some lenders may be unwilling to finance a high-mileage used car purchase. Loan Term: Usually, loans with longer terms also have higher interest rates. If the lender allows, paying off a car loan early can reduce the overall amount of interest you’d pay during the life of the loan. Personal Financial Situation: Auto lenders could consider personal financial information, such as how long you’ve been employed and your debt-to-income ratio when calculating what APR to offer you. Credit History: A borrower’s credit report may play a large part in the APR of the loan he or she can get. Buyers with excellent credit could even qualify for 0% APR from new car manufacturers offering promotions.
Fixed vs Variable APR
Average Auto Loan APRs for Different Credit Scores
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