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What Is APR on a Car? Car Loan Terms Explained

red sportscar with open hood and doors

When you’re looking at purchasing a car, there are so many different numbers and specs that you need to look at. You know that you should have all the complicated automotive specs, but you also need to master a ton of financial terms.

So, what exactly is an APR, and how does it relate to your car-buying experience? We break down everything that you need to know here, so you can get a great deal.

divider 5What Does APR Mean?

APR stands for annual percentage rate, and when it comes to cars, it refers to the interest rate on the car loan. With APR, the lower the number, the better, because that means you’ll spend less money on interest over the life of the loan.

The APR represents the amount of interest that the total would accumulate over the course of a year, and then the amount is divided down to what you owe each day.

To demonstrate the importance of getting a lower APR on your loan, here is a handy chart that highlights how much you’ll pay each month and over the course of the loan depending on its APR.

For this chart, we used a $20,000 loan over 48 months and adjusted the payment according to the APR from there.

APR (%) Monthly Payment Total Payments
2.00 $434 $20,827
3.00 $443 $21,249
4.00 $452 $21,676
4.50 $456 $21,891
5.00 $461 $22,108
5.50 $465 $22,326
6.00 $470 $22,546
7.00 $479 $22,988
8.00 $488 $23,436
9.00 $498 $23,890
10.00 $507 $24,348
15.00 $557 $26,718
20.00 $609 $29,213
25.00 $663 $31,831
blue Pontiac Trans Am car
Image Credit: RuckersSchoolFund , Pixabay

What Is a Good APR for a Car Loan?

The best interest rates for a car loan sit just above 2%. But to get these rates, you’ll need to have phenomenal credit, and you’ll likely need to work with a credit union. Most people will get an APR between 3% and 5.5%, and that’s still considered a good APR for a car.

Anything over 5.5% is a bit high, but depending on whether you’re purchasing a new or used car, it’s not unheard of to see significantly higher rates. A good rate for you depends on your credit score — the lower your credit score, the higher the APR.

How Do You Negotiate APR on a Car Loan?

If you don’t like the APR that your bank is giving you, don’t resign yourself to the higher rate. There are a few different things that you can do to try to get a lower APR, and we highlight them for you here. If you head in and start demanding a lower rate, it probably won’t get you very far!

yellow compact car on the road
Image Credit: Cock-Robin, Pixabay

Make a Down Payment

One of the easiest ways to lower your interest rate is by making a down payment. The less money that you’re taking from the bank, the more likely it’ll lower the interest rate. It’s taking less risk when it gives you less money, so it doesn’t have to take as much in interest to justify lending the money.

Use a Credit Union

When you’re trying to negotiate the best APR for your car loan, shop around! Credit unions typically give the best interest rates, but they often have membership requirements. Either way, don’t settle for the first offer that you get.

Different banks will offer you different interest rates, and even dropping the rate by a few percentage points can save you a ton of money in the long run.

red volkswagen car parked on the side of the road
Image Credit: Pexels, Pixabay

Shorten the Term Length

If you can afford the higher payments, shortening the term length can help lower the APR of your auto loan. But even if you get the same APR, you’ll still end up saving money by shortening the length of the loan.

For example, a $25,000 loan with a 5% APR will cost you $28,307 over the course of a 60-month loan. However, if you shorten the loan length to just 48 months, you can save close to $2,000 over the course of the loan and spend just $26,539!

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What Is a Good Credit Score to Buy a Car?

When it comes to credit, the higher the number you have, the better, but if you have at least a 661 credit score, you should qualify for most conventional car loans. Still, keep in mind that banks look at more than just your credit score when determining APR and approval amounts.

They also want to know how much you already have out in loans and how much you bring in each month. The less debt you have and the more money you bring in, the more likely they’ll work with you, even if you have less-than-ideal credit.

Audi Blue Car
Image Credit: Mikes-Photography, Pixabay

What Is the Fastest Way to Raise Your Credit Score?

If you’re not happy with the APR that you’re getting and don’t have the credit score to get a higher rate, you might be wondering how you can quickly raise your credit score. The truth is that you’re not going to see any changes for at least 30 days, but there are a few things that you can look into to try to quickly raise your score.

First, check for any hard hits on your credit. If you find any outstanding balances or missed payments, reach out to the company that put the hit on your credit.

If you owe it money, ensure that it agrees to remove hit on your credit when you make your payment. This is by far the most effective way to quickly rebuild your credit. From there, make all your payments every month and try not to max out your credit utilization.

Related Read: How Many Used Cars Are Sold Each Year

divider 5Final Thoughts

When it comes to purchasing a new car, finding the right car is only half the battle. The other half is financing it. While both can be overwhelming, you just need to take a step back and look at each component individually.

Now that you know a bit more about APRs and finances, you can head out to the dealership with the confidence of knowing that you can get a great deal.


Featured Image Credit: Michelle_Raponi, Pixabay

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