This is part of our car buyer glossary series, which breaks down all the terms you need to know when buying a new or used car from a dealer.
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. We’ll try to keep this short and sweet so you can learn what you need and spend your precious time buying a car.
Car loans, as you probably know, have an interest rate. In general, a fixed interest rate applies to a new car loan. So you apply for the loan, the lender will examine your credit score and history and offer you an interest rate – that is how much it will cost you to take out the loan over the term (time of the loan), expressed as a percentage .
The APR is something that the government has asked lenders to provide as part of the Truth in Lending Act of 1968. By law, the APR must include a number of fees and costs that are part of taking out a loan but which would not be obvious. are by only to the crude interest. It’s meant to protect consumers, and we think it does that and it’s a great way to compare loans.
The APR takes the interest rate and any costs associated with the loan – essentially the total cost of taking out the loan, over the entire term of the loan – and averages them as an annual percentage. With that percentage, you can compare loans and find out how much each will cost you per year.
Here’s another way to think about it: While there may be differences between loans because of the interest or cost involved, the APR is an apples-to-apples comparison of the total cost of the loan.
That is it! Use the APR to help shop for the best possible rate considering the total cost of the loan. Happy shopping.