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What is APR On a Car Loan?

mahindra-finance-author

by Mahindra Finance

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April 17, 2024

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5 mins read

You have finally found your dream car! But before driving off into the sunset, there's an important financial aspect you need to understand: the Annual Percentage Rate (APR) on a car loan. 

In this guide, we will understand what is APR in loans, and how car loan APRs differ from interest rates. We will also deep dive into factors that determine your car loan APR, and provide insights for finding the best car loan for you. 

What is APR in loan?

The APR represents the total cost of borrowing money for your car purchase. It takes into account not only the interest charged by the lender but also certain fees associated with the loan.

Understanding car loan APR vs interest rate

When it comes to financing a car, it's crucial to compare APRs rather than just interest rates. The interest rate is the cost you pay each year to borrow money expressed as a percentage. However, this rate does not reflect any fees charged for the loan.

On the other hand, the APR is an all-encompassing figure that includes both the interest rate and certain fees associated with the loan, such as origination fees. These fees are known as prepaid finance charges and can vary between lenders.

To illustrate what is APR in loan and interest rate, let's consider an example. You are comparing two car loans: Loan A has an interest rate of 5% and no additional fees, while Loan B has an interest rate of 4% but charges a 2% origination fee. Although Loan B has a lower interest rate, the inclusion of the origination fee results in a higher APR. This means that Loan B may ultimately cost you more in total compared to Loan A, despite the seemingly lower interest rate.

What factors determine your car loan APR?

Now that you understand What is APR in loans, let's explore the factors that lenders consider when determining your car loan APR. Here are some key elements they typically take into account:

  • Credit history and score: A higher credit score often translates into a lower APR, as it indicates a lower risk for the lender.
  • Down payment amount: Making a substantial down payment can reduce the amount you need to borrow, which lowers the overall cost of the loan.
  • Type of vehicle: New vehicles tend to have lower interest rates compared to used ones. Plus, certain automotive brands may offer more favourable rates due to their higher resale value.
  • Loan term length: Generally, shorter loan terms come with lower interest rates but higher monthly payments. Longer loan terms may have higher interest rates but lower monthly payments.
  • Car loan eligibility is also determined by similar factors such as credit score, income stability, employment history, existing debts, and the desired loan amount. Improving these aspects can enhance your chances of meeting the lender's criteria for car loan eligibility.

How is car loan interest calculated?

Car loan interest is typically calculated using the principal amount, interest rate, and loan tenure. Using a car EMI calculator is the simplest way to understand the total interest payable over a loan term and help you make informed decisions regarding your car loan options.

Here is an example of car loan interest calculation:

To calculate the total interest payable over the loan term, we will use the formula for compound interest:

Total Interest = Principal × [(1 + r/n)^(nt) - 1]

Where:

Principal (P) = ₹20,00,000

Annual interest rate (r) = 5% or 0.05

Number of times interest is compounded per year (n) = 12 (since interest is compounded monthly)

Loan tenure (t) = 5 years or 60 months

Plugging in these values:

Total Interest = ₹20,00,000 × [(1 + 0.05/12)^(12*5) - 1]

Total Interest ≈ ₹5,34,151.99

So, the total interest payable over the 5-year loan term would be approximately ₹5,34,152.

You can simply do this by using a car EMI calculator

A car EMI calculator simplifies this process by allowing borrowers to input the loan amount, interest rate, and tenure to estimate the monthly payments accurately. You can use a car EMI calculator to get insights into how changes in these variables affect the EMI.

Conclusion

Understanding what is APR in a loan is crucial for making informed decisions when financing your next vehicle purchase. By considering factors such as credit history, down payment amount, vehicle type, personal stability, and loan term length, you can have better control over the APR offered to you.

At Mahindra Finance, we understand that obtaining a car loan with a favourable APR is essential for our customers' financial well-being. Our dedicated team is here to assist you with expert guidance throughout the entire process.

Frequently Asked Questions

Q1: What is the difference between car loan interest rate and car loan APR?

A1: Car loan interest rate is the cost of borrowing, while APR includes other fees, providing a comprehensive borrowing cost.

Q2: Can I negotiate my car loan APR?

A2: Yes, you can negotiate your car loan APR. Start by getting prequalified from multiple lenders to compare offers. Once you have competing loan proposals, leverage them to negotiate better terms with your preferred lender or dealership.

Q3: Is it possible to refinance a car loan to get a lower APR?

A3: Yes, refinancing is an option for obtaining a lower APR on your car loan. If you have improved your credit score or market rates have decreased since taking out your original loan, refinancing can help you secure better terms and potentially save money in interest payments.

Q4: Can I improve my chances of getting a lower APR on a car loan with bad credit?

A4: While it may be more challenging to obtain a lower APR with bad credit, this can still be done by improving your credit score and saving for a larger down payment.

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