This is part of our car buyer’s glossary series which details all the terms you need to know whether you’re buying a new or used car from a dealership.
The annual percentage rate, or APR, is pretty easy to understand — and that’s good news, because there are plenty of other things to think about when buying a new car. So we’ll try to keep this nice and short so you can learn what you need and then spend your precious time shopping for a car.
Car loans, as you probably know, carry an interest rate. Generally, on a new car loan, it is a fixed rate. So, you will apply for the loan, the lender will look at your credit score and history, and offer you an interest rate – which is how much it will cost you to take out the loan over the term (loan term), expressed as a percentage.
The APR is something that the government required lenders to provide as part of the Truth in Lending Act of 1968. By law, the APR must include certain fees and charges that are part of initiating a loan, but would not be obvious just by looking at the gross interest rate. It is intended to protect consumers, and we believe it does so and is a great way to compare loans to each other.
The APR takes the interest rate and all fees associated with the loan – essentially, the total cost of underwriting the loan, over the life of the loan – then averages them out as an annual percentage. This percentage allows you to compare the loans to each other and determine how much each is going to cost you per year.
Here’s another way to think about it: While there may be differences between loans due to the interest rate or fees involved, the APR is an apples-to-apples comparison of the total cost of the loan.
That’s it! Use the APR to help you find the best rate possible, given the total cost of the loan. Good shopping.