When you finance a car you will be shown two different interest rates. One is the interest rate on the loan. The other is the APR (Annual Percentage Rate). Basically, it is the rate you’ll be charged each year on the funds you borrow. Here is why the APR is different from the interest rate on your loan.
Interest Rate vs APR
The APR on your loan includes the interest rate and all of the fees for the loan. These fees can include origination fees, management fees, etc. Since these fees are all paid to the lender, they are normally incorporated into the loan. The APR is usually only a few tenths of a point higher than the simple interest rate on a car loan. APR rates range anywhere from 0% (arguable if this is actually a good deal) to the maximum allowable rate as defined in your state’s usury laws, typically 20-30% APR. The higher your APR, the faster you want to pay off your loan. This will minimize how much you end up paying in interest.
Ways to Minimize Your APR
The best way to reduce the impact of the APR on a car loan is to offer a higher down payment. Depending on your credit you might be able to get a car loan with a down payment of ten percent or less. While that sounds good…getting a new car with less money down…it means that you will pay more money over the life of the loan. You should try to offer at least twenty percent of the total purchase price of any vehicle you buy. A higher down payment will allow you to have a lower monthly payment or a shorter loan length while saving hundreds of dollars in interest.
Secondly, you can maximize your credit score. The higher your score, the lower your APR. Generally, improving your credit is a long-term process. However, there is one way you can, potentially, to increase your score in quick fashion: checking for and disputing any errors on your credit report. Some estimates say eight out of ten consumers have errors on their reports, and these can be disputed with the credit bureaus in question with a simple letter. You can request your tri-bureau report, for free, at AnnualCreditReport.com. This is an official site, run by the major bureaus: Experian, Equifax, and Transunion.