The annual percentage rate of a new car loan explained

This is part of a series that details all of the terms you need to know if you are buying a new or used car from a dealership. Discover the rest of the series in our auto buyer glossary.

The annual percentage rate, or APR, is pretty easy to figure out – and that’s good news, because there are a lot of other things to consider when buying a new car. So we will try to make it nice and short so that you can learn what you need and then spend your precious time buying a car.

As you probably know, auto loans come with an interest rate. Generally, on a new car loan, this is a fixed rate. So, you will apply for the loan, the lender will examine your credit score and your credit history, and offer you an interest rate, which is how much it will cost you to take out the loan over the term (loan term), expressed as a percentage.

The APR is something the government has asked lenders to provide under the Truth in Lending Act of 1968. By law, the APR must include certain fees and charges that are part of initiating a loan but would not be evident by simply looking at the gross interest rate. It is about protecting consumers, and we think it does and is a great way to compare loans against each other.

The APR takes the interest rate and any charges associated with the loan – roughly the total cost of underwriting the loan, over the life of the loan – and averages them as an annual percentage. This percentage allows you to compare loans against each other and determine how much each is going to cost you per year.

Here’s another way to think about it: While there may be some differences between loans due to the interest rate or fees involved, the APR is an apple-to-apple comparison of the total cost of the loan.

That’s it! Use the APR to help you find the best possible rate, given the total cost of the loan. Good shopping.

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