Unless you will be paying cash, purchasing a vehicle generally means taking out a loan. When you select a car loan, the financial institution provides money to cover the full cost of the vehicle, which you will pay back with interest over a predetermined period of time. And the interest is the fee the lender charges to issue the money upfront. However, the interest rate doesn't tell the whole story. For that, you need to know the APR, or "annual percentage rate of charge."

What's the difference between APR and interest rate?

The interest rate of a car loan is the amount charged by the lending institution to issue the loan. The borrow wants, or needs, the full sum of the purchase price sooner and thus pays a set percentage in excess of the monthly payments for the privilege. The APR is the amount of interest for the whole year, given as a percentage, and includes all fees, such as the origination fee (the payment associated with establishing the loan account) and prepaid finance charges. Thus, the APR more accurately reflects the cost of financing a vehicle.

How do I calculate APR on a car loan?

The best way to get your APR is to ask the lender. In the United States, the Truth in Lending Act requires lenders to provide loan information, including the APR, before the borrower signs the agreement. APR must be clearly stated in the contract.

If you know the loan details ahead of time, you can estimate APR yourself. You will need the loan amount, the term length, the interest rate, and any other fees associated with the loan.

First, you will need to find your total monthly payment. If you don't know it, you can calculate it yourself. But since the total loan amount changes with every payment, it's easiest to use a spreadsheet program like Microsoft Excel or Google Sheets. Simply type the following into any cell:

  • =PMT(interest rate as a decimal/12, number of months in loan term, loan amount with fees)

Here's an example. Say you want to finance $20,000, the loan application fee is $500, the term length is 60 months, and the interest rate is 4.5%. Then, you would enter the following into any spreadsheet cell:

  • =PMT(.045/12,60,20500)

The total monthly payment would be $382.18. Note that the amount is expressed as a negative number (or in red). This is important, as the APR formula will use -$382.18.

Now, you can use the following spreadsheet formula to calculate your APR:

  • =RATE(number of months in loan term, estimated monthly payment, value of loan minus fees)*12

Using the example above, you would enter:

  • =RATE(60,-382.18,20000)*12

Here, the APR is 0.05517, or 5.517%. Knowing the APR of a car loan can help you understand how much borrowing from a certain lender will cost you, which you can compare side-by-side with other lenders in order to pay less to finance a vehicle.

Convenient Audi Financing near Norwood and Braintree

If you have any questions about financing a new Audi, please feel free to contact Audi Westwood at your convenience. Our friendly finance experts will be happy to assist you.

Categories: Finance