When you get a car loan, you will probably hear about two key numbers: The interest rate and the APR, or Annual Percentage Rate. The interest rate is the lower number. It’s the annual cost of borrowing money – the interest you’re paying the lender for the privilege of borrowing money. But the interest rate doesn’t include fees and other costs. The APR is the higher number and it reflects the total cost of borrowing, including interest.
The higher the APR, the higher your monthly payments
That’s pretty obvious but that’s how it works. Remember the APR is lower for a new car than a used model. To see how it works, let’s calculate the monthly payment with a fairly low 5% APR. Let’s say you’re buying a $35,000 car and making a $5,000 down payment. That means you’re financing $30,000. For a 48-month loan, your estimated monthly car payment is $691. If the APR is 6%, your monthly payment goes up to $705.
How does your credit affect your APR?
The better your credit, the lower your APR and the lower your monthly payments. Remember that 5% is a low APR – and most people won’t qualify for that kind of rate. If you have a “Prime” credit score in the 661 to 780 range, an APR could be around 5%. For a non-prime score from 601 to 660, a new-car APR could be 7% and a used car APR might be in double digits at around 10% to 11%. For sub-prime loans, the APR gets quite a bit higher.
How can you earn a lower APR? Make your payments
If you’ve struggled with credit and have a low credit score, you’ll have higher car payments. But you can help improve your credit – and gradually lower your future APR – by getting a car you can afford and making every single monthly payment on time or even a little early. Talk to the experts in our finance center to learn more about car loans at Lawrence Hall Ford in Anson, TX.