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How to Calculate APR on a Car Loan

How to Calculate APR on a Car Loan
Kevin Brouillard

Kevin Brouillard

Updated September 30, 2021
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There’s a lot to consider when you’re shopping for a car: make, model, new vs used, and whether to buy or lease. If you plan on using financing, shopping around for car loans is another important step before driving off the lot with your new vehicle. And one of the most important points of comparison is the auto loan’s annual percentage rate (APR).A loan’s APR indicates how much it costs to borrow money to purchase a car. Knowing how to calculate APR on a car loan can help you compare loans and determine which option is best for your budget. Here’s what you need to know about calculating auto loan APRs. 

What Is APR?

APR is the total annual cost to borrow money, including interest and fees, represented as a percentage. It also accounts for any dealer fees, rebates, or costs incurred by the borrower when obtaining any loan, including an auto loan. The lower the annual percentage rate for cars, the cheaper it is to borrow money. Sometimes, APR and interest rate may get mixed up since they’re both expressed as a percentage. The key difference is that a car loan interest rate is simply a percentage of the principal (the amount borrowed), whereas the APR accounts for fees and additional costs of borrowing money, as well as the interest. For example, the interest rate for a car loan might be 4.0%. But once various fees and costs are factored in, the APR might be 4.25%.APR is a better metric for gauging the cost of borrowing than interest rate alone. Even if two lenders offer the same interest rate and terms on a loan, the difference in their fees and extra charges will be revealed in the APR.  Before moving on to how to calculate APR on a car loan, it might be helpful to keep our comprehensive guide to auto loan terms handy. 

Calculating Your Car Loan’s APR

Knowing how to calculate APR for car loans can be of use when assessing financing options. Lenders are required by federal law to disclose the APR and other loan terms before a borrower signs the loan agreement. Still, preparing beforehand can help you determine how a car loan aligns with your budget and financial goals. Next, let’s use an example car loan APR calculation to go through the step-by-step guidance. 

1. Gather Key Information

Before diving into the actual arithmetic of how to calculate APR for car loans, you’ll need to collect the following information:
  • Principal: This is the amount of money borrowed. When you’re calculating APR, you can think of 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.
  • 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

Once you have the details above, the following formula can calculate APR for a car loan:APR = [(I/P/T) x 365] x 100
  • I = Interest, taxes, and fees
  • P = Principal
  • T = Term (in days)
For this example APR calculation, we’ll give the interest amount, fees, and taxes a combined value of $5,000. The principal is $25,000, and the loan term is 60 months (or 1,825 days). APR = [($5,000/$25,000/1,825) x 365] x 100APR = 4%Some lenders may provide an auto loan calculator to crunch the numbers for you. Typically, you input the borrowed amount, interest rate, loan term, and other information to get APR and monthly payment estimates.There are other factors that impact APR with car loans, but this can offer a ballpark figure for reference.  

How Do Auto Lenders Calculate APR?

The method for figuring out what APR to offer on a car loan can differ among lenders. But while the loan terms and approval are ultimately up to the individual lender, these are some key APR components that may be considered. 
  • 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 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. 
  • 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 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

Lenders can offer fixed- or variable rate financing. Fixed-rate auto loans have consistent payments for the entire loan term, meaning that you can project how much interest you’ll pay each month. Alternatively, the APR for variable-rate loans can fluctuate as the interest rate changes according to index changes. The APR could increase or decrease over the life of the loan. 

Average Auto Loan APRs for Different Credit Scores

Concerned about whether you can get an auto loan with less-than-stellar credit? Fret not: At most credit levels, there are still financing options available from banks, credit unions, and online lenders. However, your credit score will impact your chances of getting a good car loan interest rate and APR. Borrowers in the highest credit range had an average APR of 4.96% for a loan for a new car, whereas loans to “credit invisible” buyers had an average APR of 18.21% for a loan for a new car. While interest rate isn’t as comprehensive as APR, it’s the major component in APR and can illustrate how much rates vary by credit score. Here’s a breakdown of average auto loan interest rates in 2020 by credit score and car type pulled from credit bureau Experian. 
Having a solid credit score can help reduce the overall cost of borrowing money. Checking your credit score beforehand can help you know where you stand before approaching lenders for an auto loan. When they’re looking at car loan applications, lenders may use a FICO® Auto Score that places greater emphasis on auto-loan-oriented behavior and risk than does a regular FICO score. If you’ve stayed current on car payments for the past seven years, your FICO® Auto Score may be in better shape. Other traditional creditworthiness factors like repayment history and number of accounts are still important, too. 

The Takeaway

Understanding how to calculate APR on a car loan is useful when you're evaluating financing options. It’s also worth reviewing your credit score and personal finances to get a clearer picture of how much your interest rate is likely to be. It’s not the only factor in your APR, but it’s a major one.Keep in mind that obtaining or refinancing a car loan with bad credit is often possible. Refinancing could even reduce your interest rate if your credit score has improved. And, done properly, it can help avoid a scenario known as an upside down auto loan, which means that you owe more money than the car is worth.If you’re looking to refinance your car loan, Lantern by SoFi can help. Simply by filling out one online form, you’ll be able to compare auto refinancing options from multiple lenders. 
Photo credit: iStock/Chainarong Prasertthai
The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.SOLC0821138

About the Author

Kevin Brouillard

Kevin Brouillard

Kevin Brouillard is a Returned Peace Corps Volunteer, educator, and personal finance writer. His work has appeared in online publications such as Earth Island Journal, Jetsetter, Oyster.com, and Tripsavvy. Kevin covers an array of financial topics for SoFi, including loans for students and small businesses.
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