What Determines Your Auto Financing APR?
Discover how your annual percentage rate is determined and learn how to lower it.
Originally published on October 16, 2017
When you’re in the market for a car, you hear a lot about APR, or Annual Percentage Rate. But what exactly is it? When you borrow money you have to pay back the principal, which is the actual amount of money borrowed. You also have to pay interest, which is the charge for borrowing the money. The APR is a number that’s used to show how much interest will be paid to the finance company based on the outstanding principal if all payments are made on schedule. The amount of interest you may pay can vary a lot since the APR is determined based on a variety of factors. Among others, these factors typically include credit history, amount financed, length of the term, age of collateral, vehicle, and the down payment.
Here are some key factors in how the APR is calculated for a car:
Your credit history
The better your credit, the lower the interest rate. Buyers with stellar credit may qualify for attractive APRs; new car manufacturer offers can be as low as 0%. Poor credit can lead to paying high interest rates, sometimes exceeding 20%.
Generally speaking, the higher the down payment you make, the lower your interest rate will be. By doing this, more finance companies may be willing to take on your loan. This is because you reduce the risk of becoming upside down on your loan (where you owe more than the car is worth), and you essentially have more financial skin in the game so you’re less likely to default.
Age of the car
In general, lenders tend to have lower interest rates for newer cars and higher interest rates for older cars.
Length of the loan
Generally, the higher the loan term, the higher the interest rate you’ll get if all other factors remain the same.
OTHER THINGS TO CONSIDER
There are also other factors that’ll impact your APR on a car. For example, finance companies will also look at how long you've worked at your current job/occupation, your income, and monthly expenses to estimate how likely you’ll be able to pay existing and new debts. A diverse credit portfolio with lines of credit from various financial institutions can illustrate that you have successfully managed different kinds of credit, which typically appeals to lenders.