December 6, 2023

Car Auto Finance

Car Auto Finance FOR Everyone

How to Calculate APR for Your Car Loan

If you’re shopping for a new or used car, you’ve hopefully done some calculations to figure out exactly how much car you can afford. But have you considered the cost of your auto loan?

There are lots of factors that contribute to your auto loan terms, like the APR. In this article, we’ll explain what is APR on a car loan, how to calculate APR, and how you can get the best APR for your situation.

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What Is APR on a Car?

The annual percentage rate (APR) on a car is the total cost per year of borrowing money. It’s a percentage of the loan’s balance, plus additional fees. Although they’re both percentages, the APR differs from the interest rate. While a car loan interest rate is only a percentage of the principal or the amount borrowed, the APR also includes fees and other costs of borrowing the money.

For example, a car loan with a 4 percent interest rate could have a 4.3 percent APR. The difference comes from fees not included in the interest rate. Using the APR to determine the cost of a loan is usually more accurate than using the interest rate alone. Even if two lenders offer the same interest rate, one company might have a higher APR if they charge higher fees.

How to Calculate APR for a Car Loan

The easiest way to calculate the APR of a car loan is to use an online APR and interest rate calculator. However, this involves knowing the estimated monthly payment, interest rate, and other fees.

If you don’t have these figures on hand, you can ask your lender what the loan APR is. The lender may also provide a breakdown of how they arrived at the APR.

Frequently Asked Questions

Here are some frequently asked questions about car loan APRs:

How Do Lenders Decide Interest Rates and APRs?

Lenders use several factors to determine your interest rates and APRs, including:

  • Credit score
  • Amount of money borrowed
  • Length of the loan
  • Down payment
  • Type of vehicle (new vs. used)

In general, borrowers with a high credit score and high income pay the lowest interest rates. Some lenders even offer 0 percent APR as a promotion to people with high credit scores.

You can also get a lower interest rate and APR if you finance a used car instead of a new car. Lastly, choosing a loan with a long repayment period will raise your interest rate and APR, so opt for a shorter term if possible. You can often qualify for a lower APR by making a higher down payment, which means you borrow less money.

Do Car Dealerships or Banks Offer Better APRs?

In general, banks and other financial institutions usually offer lower APRs than dealerships. However, getting a car loan through a dealership is usually faster and easier than applying for an auto loan at a bank.

The dealer will check your credit and submit your loan application to multiple lenders. This lets you compare available rates easily. Some dealers offer in-house financing, as well.

How Are Fixed and Variable APRs Different from Each Other?

A fixed APR doesn’t change throughout the length of the loan. If you pay 4 percent during the first year of your auto loan, you’ll continue to pay 4 percent during subsequent years. A fixed-rate APR can be a good option if you get a loan when rates are low.

A variable APR, on the other hand, fluctuates as market interest rates change. Depending on the decisions of the Federal Reserve, your APR could increase or decrease. If interest rates and APRs are high when you buy your car, a variable APR could let you pay less in interest when rates drop.

However, there’s always a risk that rates will increase. With a higher APR, your monthly payment will likely increase, as well.

Can Refinancing Reduce Your APR?

Whether you have a fixed-rate or a variable-rate car loan, refinancing can reduce your APR in some circumstances. If your credit score has improved or market rates have gone down, you might qualify for a lower APR.

It’s a good idea to calculate the amount you would pay for the new loan carefully before you agree to the terms. Refinancing usually involves paying a variety of fees, and your savings on APR might not be enough to cover these expenses.

Headshot of Elizabeth Rivelli

Finance & Insurance Editor

Elizabeth Rivelli is a freelance writer with more than three years of experience covering personal finance and insurance. She has extensive knowledge of various insurance lines, including car insurance and property insurance. Her byline has appeared in dozens of online finance publications, like The Balance, Investopedia,, Forbes, and Bankrate.