Auto Financing: What You Need To Know About APR

What You Need To Know About APR

When it’s time to shop for a new car, you probably research safety features, tech upgrades or maybe even the benefits of electric vehicles if that’s what you’re considering.

You’ll also probably see a lot of finance-related terms, including annual percentage rate (APR). For this one especially, you’ll want to try and learn as much as you can, due to the major role it plays in the cost of financing your new vehicle.

What is APR?

Annual percentage rate (APR) represents the total cost of financing the purchase of a vehicle and includes the interest rate, fees and other finance charges. An APR is expressed as a percentage, and a higher APR means you will pay more for the car over the life of its contract.

The APR may be one of the most important numbers you consider, along with the amount you’re financing. Why? Because even a small change in percentage points can represent thousands of dollars saved – or lost – over the duration of your contract.

Adding it all up

Understanding what’s included in annual percentage rates can help you make a better-informed decision when it comes to vehicle financing.

• Interest rate
  While people often use “APR” and “interest rate” interchangeably, the interest rate is a single component of an APR. The interest rate is the percentage of the amount financed charged by the finance company. Simply put, having a lower interest rate means you pay less interest. It also means more of your monthly payment can go toward the loan principal, paying off the vehicle quicker.
• Fees and charges
  Various fees and charges are part of any finance contract and are included in the APR. These may include origination fees, dealership fees, documentation fees and processing fees. It’s critical for buyers to be aware of these additional costs when calculating the overall cost of auto financing.
• Contract term
  Even though longer terms can have a lower APR due to one-time charges that are considered finance charges, higher APR loans will be more costly the longer the loan term. Keep this in mind when weighing the pros and cons of a long-term contract.

Lower your costs

Lenders use a variety of criteria to determine your interest rate. These can include your credit score, the amount you’re financing and the amount of your down payment. While these are some of the standard measurements in place, there are ways you can lower your interest rate.

• Shop around
  It’s likely you’ll receive several offers when applying for vehicle financing. But explore your options and compare APRs from several finance companies to get the best deal.
• Check your credit
  Finance companies use credit scores to determine creditworthiness. From their perspective, the lower your credit score, the higher the risk for approving financing. And the higher your credit score, the lower the risk. Because the lower your credit score, the higher your interest rate, it’s important to know what’s on your credit report.
  
  Checking your credit status is simple to do. You can download one free copy of your credit report every 12 months from annualcreditreport.com or request one from any of the three credit reporting bureaus, Experian, TransUnion or Equifax. A credit report does not typically include your credit score, but it will allow you to review information like your payment history and the amount you owe your creditors. You’ll also want to check for errors on your report, as they can lower your score.
• Consider making a larger down payment
  To an auto finance company, a larger down payment could demonstrate that you are a low-risk borrower. A larger down payment may help lower your interest rate, and in turn, your APR. Another potential benefit is that with a larger down payment, your amount financed is lower and you can pay off your vehicle sooner rather than later.
• Keep it short
  The APR of an auto finance contract impacts how much you will pay to finance your purchase over the entire lifetime of the contract. So, if possible, opt for an offer that has the lower APR and the shortest term possible. While your payments may be slightly higher, you’ll pay less interest over the life of the finance contract. And auto finance companies may be more motivated to offer a lower APR on a shorter term since it takes less time to pay it back.

Understanding the factors that can influence your APR is crucial when it comes to auto financing. Feel better prepared by knowing key auto financing terms and learning more about the total cost of vehicle ownership

By Katrina Lewis, GM Financial

A fan of suspense novels, food trucks and pop culture, Katrina Lewis is passionate about writing to educate and inform, especially when it comes to finances and customer options when leases or contracts are ending. A “boy mom,” Katrina loves playing monster trucks with her son, random day trips and venturing out to various festivals with her family.