How Do I Know What My Car Finance APR Will Be?

So you're ready to research your car finance? Great, way to go! 🎉  But you will probably be wondering how much interest you are likely to be charged. When shopping for a car, you'll hear a lot about the annual percentage rate (APR). This rate is the cost you will be charged each year when you borrow money. It's an excellent way to be able to compare loan costs, like for like. Lenders are expected to disclose their APR before closing on your loan.

Lenders are expected to disclose their APR before closing on your loan. Different financial institutions offer varying rates; therefore, it's always best to compare offers before settling on one. Besides visiting the lender, you can also estimate your own figure using a car finance APR calculator. When calculating this, use the loan amount, length of the loan term, interest rate, and extra fees.

Various factors determine the APR. Let's take a look at some of them.

Personal vs. Representative APR

The APR differs from person to person. The personal APR is tailored according to individual financial situations and capabilities.

On the other hand, representative APR is displayed by lenders while advertising. Often indicated on their websites, this is the base rate that most applicants get and is very helpful when using a car finance APR calculator.

How To Calculate APR

Use Online Estimation Tools

With technology, it’s become much easier to calculate your own APR. You can use a computer car finance spreadsheet program provided by some lenders to estimate what percentage you need to pay. Once you have the loan details, there is a formula to come up with this figure.

Contact Your Lender

If computing this percentage proves challenging, you can always ask your lender for assistance. Before you sign any documents, they need to brief you on all the details. The APR should also be indicated in your contract.

Factors Influencing APR

Your Credit Score and History

Borrowers with excellent credit ratings are charged lower interest rates. If your score is considered stellar, you can qualify for car loans with a 0% APR from the manufacturers.

However, if you have a backlog of debt, you may end up paying more than 20% interest. Because of this, it's advisable to work on improving your rating before approaching a lender, if you want to get a better rate.

If You Are Buying A New Car Or a Used Car

Most lenders offer high-interest rates for old cars and better rates for new ones. Newer vehicles come with manufacturer incentives and have a higher resale value making them more attractive to lenders. Therefore, factor in these aspects when going to the dealership.

The Size Of Your Down Payment

When shopping from a dealership, you are required to make a down payment. The higher your deposit, the lower your interest rate will be.

Lenders factor in this element because the higher the cash you have paid, the higher the guarantee that you won't default on the loan. If you pay more cash in the deposit, finance companies will be more willing to fund you.  

The Loan Term

If you go for longer loan terms, it becomes expensive in the long run. A term of more than 5 years means you will take longer to repay the loan, which adds to the total charges. These types of loans are also considered high-risk.

Your Financial Situation

Before approving your loan, finance companies look at your current and past financial history. These aspects include your monthly income, current job, and monthly expenses. An analysis of these financial obligations indicates whether you are capable of servicing your loan.

What Is The Importance Of Knowing Your APR?

A complete understanding of the APR you are expected to pay by your lender helps in the decision-making process. You also get how much it will cost you to borrow money. The lower your APR, the less cash you will spend. Make use of the car finance APR calculators as a budgeting tool.

Researching the different rates offered by various lenders helps you identify the cheaper loan. A slight difference in the percentage means fewer costs.

How To Get A Low APR Car Loan

Get A Pre-Approval

As you shop for a car, don't forget to also shop for a car loan. You can get the best deals by comparing different lenders. If your credit rating is excellent, get pre-approval from several financial lenders to fully understand how much you can borrow.

Approach Different Lenders

You can start by first contacting your bank, where you have an existing relationship. This gives you the advantage of negotiating better APR rates.

On the other hand, if you are going the dealership way, several lenders specialise in auto loans. These companies have more incentives and, in return, charge lower interest rates.

Improve Your Credit Score

If you are not satisfied with lenders' APR rates, the problem could be your credit. To get better deals, improve your rating by paying off any debts and making yourself more creditworthy. A superb rating is the quickest way to get a good APR.

Shorten Your Loan Term

Having a shorter loan term means you pay higher monthly payments each time. Adapting this as a strategy could significantly reduce your APR.

Save Up More

You could also save up more cash to finance your car purchase. This means you pay a higher down payment and get a lower interest rate.

What's A Good Car Loan APR?

New car purchases can have an average interest rate ranging from 4% to 14% on a 4-5 year loan term. This value differs depending on the lender and the factors we have detailed above. A credit score makes all the difference in what makes a good car loan APR. Rates for used car finance range between 6.9% and 40% APR.

Takeaway

Interest charges significantly impact the monthly payments you make on a car loan. Learning how to use the car finance APR calculator is a crucial skill for any car buyer. Before signing up for any deals with a lender, make sure you have the expected APR in the contract. The best way to get a good deal is by comparing the rates offered by different finance companies.