How Is the APR for a Vehicle Calculated

APR, or annual percentage rate, is the sum of yearly interest charged on your loan. It includes the interest rate and all additional charges to complete the procedure. Banks pay a bit of interest to customers who regularly pay their credit card bills. However, banks still make money by charging more than they pay out.

If you haven’t successfully managed your wealth risks, it affects your credit rating, and you’ll have to pay more monthly and annual interest on your loan.

Factors Lenders Use to Calculate APR

APR includes primary interests, but it also includes factors such as the car’s age. If you think you will be able to save more by buying an older car, be aware that this may only work if you are paying cash. Older cars are a greater risk; many people will choose to get a different car rather than pay a large repair bill. Because there’s a greater risk the car won’t last long, you may pay more in interest.

Ask Lots of Questions

You deserve to know the APR on your loan before you sign the paperwork. If you don’t see it on the contract, ask. If they can’t or won’t tell you, it may be time to work with a different lender. Knowing the percentage you’ll pay before you agree to the loan can significantly impact your overall paid interest. Even 1% point on a $20,000 loan over six years can lead to hundreds more paid out.

APR is More than Just Interest

Your interest rate is what you’ll pay for the dollars you borrow from the bank. Your APR rate includes all the fees for the loan. Depending on the lender’s standard practices and credit rating scheme, this may include just an origination fee or additional prepaid finance charges included in your loan.

Sometimes paying a higher APR is the best thing for your budget. For example, if you have a 5-year loan on a car that you have paid on for three years and your financial situation changes for the worse, refinancing the current debt for another five years could drop your payment to stay on top of your expenses.

Will a Refi Help?

By the time you sign for the first car loan, you will be on the hook for all those prepaid financing charges; the original lender has policies to ensure their risk is covered before you get the keys. According to Lantern by SoFi, you can save by  refinancing a car as long as

  • you are not upside down on the loan
  • your credit score has gone up
  • the car is still in good shape

Check out your car on REI Blue Book to see its current sale value. If you can’t sell it for what you owe, a refinance may not be effective.

Every budget is different. If your credit score is poor, you may be better off using public transport and saving up for at least a partial down payment; this can reduce the interest you have to pay for the life of the remaining loan.

Adam Hansen

Adam is a part time journalist, entrepreneur, investor and father.