What is APR on a Car Loan? Everything You Need to Know

Readers will learn:

• What APR means and how it affects your car loan’s total cost
• Key factors lenders use to calculate APR, including credit score, down payment, and market conditions
• What qualifies as a “good” APR based on credit tiers
• Smart negotiation tactics to help lower your APR
• How a dealership like Vantage Auto Group simplifies financing and pre-approval

When you need a new car, you have a couple of options. Namely: leasing your vehicle, paying outright in cash, or financing it. Many Americans find financing to be a quick and affordable way to purchase a car. But, as with everything, it’s important to read the fine print and understand the nature of the debt you’re taking on.

If you look closely at your financing agreement, it likely mentions “APR” as a line item in your overall expenditure. But exactly what is APR on a car loan? And how does it affect the overall cost to your family?

Vantage Auto Group is here to inform you about this common financing term so you can better determine if financing is the right option for you.

APR Meaning for Car Loans

When you finance a car, it is much like borrowing money for your home mortgage. In an auto financing agreement, the buyer is requesting from a bank or creditor a total amount to cover the price of the vehicle, to be paid back in (typically) monthly installments.

However, banks and creditors expect to make money from the deal. After all, they are front-loading an often large sum of money on the hopes that it will be paid back to them in due time. This is where APR comes into play.

APR stands for “annual percentage rate” for an auto loan. It is the percentage of interest you will pay on the initial value of the loan (called the “principal”). Generally speaking, higher interest rates will mean a higher monthly payment over the life of the loan.

How is APR Calculated?

Rates are set by creditors upon a request for a loan. Rates can fluctuate depending on a variety of factors. APR is calculated based on:

• Market conditions,
• Your credit score and credit history,
• The amount of money you put down on your vehicle,
• Your debt-to-income ratio (colloquially referred to as a DTI),
• The length of your loan,
• And more.

As you can imagine, no two car buyers’ rates will ever look exactly the same. Generally speaking, the better the financial outlook for a prospective buyer, the better the rate they are offered.

For instance, a high credit scored car buyer putting a decent amount down on their vehicle will likely have a much lower APR on their loan than a buyer needing to finance most of the vehicle’s cost, a buyer who has a poor credit score, or more.

Similarly, APRs are determined based on constantly changing market conditions, including rates set by the Fed. Rate hikes and cuts, affecting everyone from auto shoppers to home buyers, can have a direct correlation to the amount of APR that is expected on a given auto loan.

What’s a Good APR for a Car?

While values are constantly changing, a bit of conventional wisdom stands here. As of this writing, good rates depending on credit score are as follows:

• Superprime scores: Lower APR at around 5% for new cars and around 7% for used cars‍
• Prime scores: Median APR at around 6% for new cars and around 9% for used cars‍
• Nonprime scores: Higher APR at around 10% for new cars and around 14% for used cars

As you can see, the credit score of the prospective buyer can have a vast impact on the APR they can expect to pay. Where superprime credit holders (those with excellent credit) can expect good rates and nonprime credit holders (those with poor credit) can expect worse ones, this isn’t to say your credit score holds all the cars where your APR is concerned.

Can You Negotiate APR on a Car Loan?

The ability to negotiate your APR determines largely on your creditor, on your financial savviness, and on your ability to negotiate. But to be clear: it is possible to negotiate your rate. Here are a few tips:

• Get pre-approved.
• Negotiate your car’s price down.
• Make a larger down payment on the vehicle to lower your debt.
• Use a co-signor with better credit.
• Consider comparing loans from different creditors.

So yes, you can negotiate APR on a car loan. Each of these tactics and more can help show to your creditor you are serious and intend to make good on your request. And that, in turn, can make it more likely they will offer a better rate.

Discover New and Used Vehicles at Prices You’ll Love

Once you’ve determined a new car is in your future, it pays to discover vehicles and interest rates alike that match your budget.

At Vantage Auto Group, we make financing cars dead simple. With pre-approval on annual percentage rate auto loans made possible within minutes and a broad selection of new and used vehicles in a wide range of makes, models, and prices, we strive to be your one-stop-shop for all your vehicle financing needs. Think of us as your concierge for the best vehicles and the best financing options available to you.

‍Fill out Vantage Auto Group's free credit application.