Car loans come with plenty of paperwork, but that’s why you come to a trusted dealer like Freedom Toyota of Harrisburg for your car buying needs. You want someone who can dig deep, explain all of the terms, and work with you so you’re not just signing the paperwork, you’re getting a clear understanding of it. It’s a level of transparency that makes Freedom Toyota of Harrisburg the go-to dealer in the Harrisburg region.
One question we hear again and again, and that still seems to mystify some car buyers, is “what is an APR?” Today, we want to make sure you understand what APR is, how it relates to other car financing terms, and how to know if you are getting a good APR or not.
The Annual Percentage Rate, or APR, is the total amount of interest paid on the financing of a vehicle, over the term of one year.
Effectively, it is a comparison tool. It stems from the Truth in Lending Act of 1968, where the government told lenders they need to provide a tool for consumers to compare apples to apples, instead of having to comb the fine print to find they are comparing apples to oranges. The APR must include fees and charges that are part of initiating and maintaining the loan, and providing you with the total cost of the loan over the whole term, averaged to an annual percentage.
You’re likely to see the term “interest rate” batted around, often when discussing APR. Be wary, as they aren’t the same thing.
The interest rate is how much it will cost per period to take out your loan, over the course of a loan. You might get quoted at a rate anywhere from 2-2.25% (if you have good credit) up to 20% if you have bad or no credit. It all varies depending on the term of the loan, the type and age of the vehicle you’re looking at, and other variables.
Interest rates do not include those fees and charges that the APR includes – so equal interest rates aren’t always equal.
For instance, consider a $20,000 vehicle.
In this case, the loan from Bank A would have an APR of 9.0679%, while Bank B would have an APR of 7.8815%. Bank C, despite having a higher interest rate, actually has a lower APR as it does not have any associated financing fees attached – it comes in at 7.1%. Even though Banks A and B have equal interest rates, their APR is not the same.
Looking back at that example, Bank A had a higher APR that Bank B, but that’s because of the shorter loan period. At the end of the loans, your payments to Bank A would be $24,949.51 in total over 5 years, while you’d be paying Bank B $25,164.33 over the course of the loan. At $24,619.77, the loan from Bank C will be the lowest overall payment, at $24,619.77.
While APR is a great annual comparison tool, it doesn’t tell the full story. A higher APR over a shorter term can end up costing you less in the long run. APR only gives you a glimpse at an annual period. It only concentrates on the fees and interest and ignores the full cost over time.
This is the next logical question, but it’s one that is hard to answer.
As we noted above, a high APR over a short term means less total cash output. A lower APR over a mid-length term may have slightly higher cash output.
It all comes down to individual tolerances. If you can afford short-term, high-amount payments, a higher APR could still lead to a lower total loan cost over the loan period. If you need to stretch out your loan, you’ll likely get a lower APR – but you’ll also likely to pay more in the long run.
Your best bet would be to have our team here at Freedom Toyota of Harrisburg break down the costs of comparative loans for you, and highlight what works best for you. Keep in mind, these rates are offered by our partners – while it would be great to be able to cherry-pick financing fees from one loan and the interest rate from another to get a lower APR, it’s up to the bank in the end. It’s a balancing act, and you’ll always have to give up one for the other.
At the end of the day, the best way to figure out which loan is the best loan for you is to come and discuss your options with our expert financing team here at Freedom Toyota of Harrisburg. As the leading Toyota dealer in the Harrisburg area, we know how to navigate the seas of vehicle financing, and we are happy to work with you to find the loan that best meets your needs.
Want to learn more about APR or about other car financing terms? Have questions about car financing options? Ready to fill out a car loan application? Contact our staff at Freedom Toyota of Harrisburg for more information or to schedule a test drive!
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