The annual percentage rate or APR on a car loan indicates how much it costs to borrow money to buy a car. It includes both the interest rate and fees. The lower the annual percentage rate for cars, the cheaper it is to borrow money. Knowing how to calculate APR on a car loan can help you compare loans and determine which option is best for your budget.
Some lenders may offer 0% APR financing. Others may offer subprime auto loans with the APR well into the double digits on a new car loan. Below, learn all about calculating auto loan APRs so you can make the best choice for your needs.
Key Points
• Calculating the APR, or annual percentage rate, on a car loan involves knowing the principal, interest rate, loan term, fees, and taxes.
• APR expresses the comprehensive cost of borrowing money, including the interest rate and fees.
• A down payment can reduce the APR and interest rate.
• Fixed-rate loans have consistent payments, while variable-rate loans have fluctuating APRs.
• Credit scores impact APR, with higher scores typically securing more favorable, or lower, rates.
What Is APR?
APR is the total annual cost to borrow money, including interest and fees, represented as a percentage. It also accounts for any dealer fees, rebates, or costs incurred by the borrower when obtaining any loan, including an auto loan.
Sometimes a loan’s APR and interest rate may get mixed up since they’re both expressed as a percentage. The key difference is that a car loan interest rate is simply a percentage of the principal (the amount borrowed), whereas the APR accounts for fees and additional costs of borrowing money, as well as the interest. For example, the interest rate for a car loan might be 7%. But once various fees and costs are factored in, the APR might be 7.25%.
APR is a better metric for gauging the cost of borrowing than the interest rate alone. Even if two lenders offer the same interest rate and repayment term on a loan, the difference in their fees and extra charges will be revealed in the APR. Comparing APRs can help you find the right auto loan financing or auto loan refinancing for your needs.
Calculating Your Car Loan’s APR
Knowing how to calculate APR for car loans can be of use when assessing financing options.
Lenders are generally required by federal law to disclose the APR and other loan terms before a borrower signs the loan agreement. Still, preparing beforehand can help you determine how a car loan aligns with your budget and financial goals.
Here’s how to calculate APR on a car loan:
1. Gather Key Information
Before diving into the actual arithmetic of how to calculate APR for car loans, you’ll need to collect the following information:
• Principal. This is the amount of money borrowed. When you’re calculating car loan APR, you can think of car loan principal as the price of the car minus your down payment and the value of a trade-in vehicle (if you traded one in).
• Interest rate. This represents the percentage charged on top of the principal each year. In your DIY calculation, this may be an estimated value. The best interest rate on a car loan can be as low as 0%.
• Loan term. This is the length of the auto loan, usually expressed in months or years. Borrowers can have long-term auto loans greater than 84 months or short-term auto loans as low as 12 months. The typical length is five or six years, or 60-72 months.
• Fees. Any additional costs, such as origination fees, are factored into the APR, so you’ll need to know what those are, too.
• Taxes. Applicable state, county, and city sales taxes can be rolled into a car loan.
2. Run the APR Equation
Once you have the details above, the following formula can calculate the APR for a car loan:
APR = [(I/P/T) x 365] x 100
• I = Interest, taxes, and fees
• P = Principal
• T = Term (in days)
For this example APR calculation, say the interest amount, fees, and taxes have a combined value of $10,000. The principal is $25,000, and the loan term is 60 months (or 1,825 days).
APR = [($10,000/$25,000/1,825) x 365] x 100
APR = 8%
Some lenders may provide an auto loan calculator to crunch the numbers for you. Typically, you input the borrowed amount, interest rate, loan term, and other information to get APR and monthly payment estimates.
Other factors may impact APR with car loans, but this formula can offer a ballpark figure for your reference.
How Do Auto Lenders Calculate APR?
The method for figuring out what APR to offer on a car loan can differ among lenders. But while the loan terms and approval are ultimately up to the individual lender, these are some key APR components that may be considered:
Down Payment
The amount of money you put down for an auto loan could help secure a lower interest rate and a lower APR. Trading in your old vehicle can be a convenient way to fund a car loan down payment. You can check online sites like CARFAX® or Autotrader® to get an estimate on your trade-in’s value.
Vehicle Age and Condition
If you’re buying a used car, lenders can evaluate a car’s manufacture date, mileage, and general wear and tear when calculating car loan APR. Typically, newer cars fetch lower rates than older vehicles. Some lenders may be unwilling to finance a high-mileage used car purchase.
Loan Term
Loans with longer terms may have higher interest rates than loans with shorter terms. If the lender allows, paying off a car loan early can reduce the overall amount of interest you’d pay during the life of the loan.
Personal Financial Situation
Auto lenders could consider personal financial information, such as how long you’ve been employed and your debt-to-income ratio (DTI) when calculating what APR to offer you. Lenders generally like to see a DTI below 36%, though some may be willing to lend with a figure of up to 50%.
Credit History
A borrower’s credit report may play a large part in the APR of the loan he or she can get. Buyers with excellent credit could even qualify for 0% APR financing on a new car purchase.
Fixed vs Variable APR
Lenders can offer fixed- or variable-rate financing.
Fixed-rate auto loans have consistent payments for the entire loan term, meaning that you can project how much interest you’ll pay each month.
Alternatively, the APR for variable-rate loans can fluctuate as the interest rate changes according to index changes. The APR could increase or decrease over the life of the loan. If you’re unhappy with the APR on your car loan, you may explore auto refinancing or find someone to take over your car loan.
Recommended: Auto Refinance Calculator
Average Auto Loan APRs for Different Credit Scores
Are you concerned about whether you can get subprime auto loans for bad credit? Fret not: There are some auto loan financing options available to borrowers with poor credit scores between 300 and 579.
Your credit score, however, may impact your chances of getting a favorable car loan interest rate and APR. Borrowers with super prime credit had an average new car loan rate of 5.08% compared with 15.43% for borrowers with deep subprime credit in the third quarter of 2024.
While interest rate isn’t as comprehensive as APR, it’s the major component in APR and can illustrate how much rates may vary by credit score. Using data from Experian® (one of the big three credit bureaus), here’s a breakdown of average auto loan interest rates by credit score and car type:
| Credit score | Average new car loan rate | Average used car loan rate |
|---|---|---|
| Super prime: 781–850 | 5.08% | 7.41% |
| Prime: 661–780 | 6.70% | 9.63% |
| Near prime: 601–660 | 9.73% | 14.07% |
| Subprime: 501–600 | 13.00% | 18.95% |
| Deep subprime: 300–500 | 15.43% | 21.55% |
Having a solid credit score can help reduce the overall cost of borrowing money. Checking your credit score beforehand can help you know where you stand before approaching lenders for an auto loan.
When they’re looking at car loan applications, lenders may use a FICO® Auto Score that places greater emphasis on previous auto-loan management and risk than a regular FICO Score does. If you’ve stayed current on car payments for the past seven years, your FICO Auto Score may be in better shape.
Other traditional creditworthiness factors like repayment history and number of accounts are still important, too.
Recommended: Refinance Car With Same Lender
The Takeaway
Understanding how to calculate APR on a car loan is useful when you’re evaluating financing options. It gives a more accurate picture of the cost of borrowing, because it reflects not only the interest rate assessed but also the fees that will be charged. Knowing how lenders calculate APR can help you negotiate and secure the car loan financing that suits you best.
If you’re seeking auto loan refinancing, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your car in minutes.
FAQ
Is a 0% APR car loan worth it?
Your personal circumstances may dictate whether a 0% APR car loan is right for you. A 0% APR car loan includes no interest charges, but borrowers who accept 0% APR financing on a car may not qualify for certain discounts or bonus cash rebates. A car manufacturer’s cash rebate can reduce your auto loan borrowing costs. Also, only certain prospective buyers may be offered this deal, and only for specific vehicles.
How does auto refinancing affect your car loan APR?
Refinancing your car loan may provide you with a lower APR and/or lower monthly payment. If you accept and get approved for an auto refi loan, your new lender would pay off your original car loan, and you’ll be responsible for repaying the refi loan over a set term. Refinancing a car loan with bad credit may be possible if you have sufficient income.
Does a down payment lower your APR?
Making a down payment on a car reduces the amount of money you need to borrow to finance a car purchase. Lenders may offer a lower car loan interest rate if you make a sizable down payment vs. no down payment on a car. A sizable down payment can also help avoid a scenario known as an upside-down auto loan, which means that you owe more money than the car is worth.
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