Understanding APR: What You Should Know Before Getting a Loan
When buying a car, financing often plays a crucial role in making your dream vehicle affordable. However, navigating the financing process can be confusing, especially when trying to understand financing terms like “APR”. At Mike White Ford in North Idaho, we believe an informed buyer is a confident buyer. Here’s what you need to know about APR before financing your next car.
What Is APR?
APR, or Annual Percentage Rate, represents the yearly cost of borrowing money, including interest on the principal amount borrowed and any additional fees for the loan itself. APR is expressed as a percentage, which you apply to the unpaid balance of your loan to determine the amount of interest you are paying. The additional amount of funds you need to pay is incorporated into your monthly payments.
Unlike a flat interest rate, which reflects only the flat cost of borrowing money, the APR provides a more comprehensive picture of what you’ll pay over the life of the loan as you pay it down. For example, a loan with a 5% interest rate and no additional fees might seem the same as a loan with a 5% interest rate and origination fees, but when you calculate your payments, the hard numbers could result in that latter loan having an APR closer to 6%.
Understanding APR is critical when comparing loan options, as it helps you see the actual cost of financing beyond just your monthly payment.
How Is APR Calculated?
The APR on an auto loan is influenced by a variety of factors, including:
- Loan Amount: The total amount you borrow
- Loan Term: The length of time you’ll take to repay the loan
- Interest Rate: The base percentage the lender charges for lending you money
- Fees: Any additional charges, such as loan origination fees or administrative costs
To illustrate it more clearly, let’s consider an example. Here is a comparison of two loan offers to purchase a $25,000 car:
| Loan Details | Loan 1 | Loan 2 |
| Loan Term | 60 months (5 years) | 60 months (5 years) |
| Interest Rate | 3.5% | 7.0% |
| Fees | $0 | $500 |
| APR | 3.5% | 7.2% |
| Monthly Payment | $455 | $505 |
| Total Cost of Loan | $27,288 | $29,796 |
As you can see, a higher APR and the addition of fees can significantly affect your monthly payments and the total amount you pay out over time.
How Your Credit Score Affects Your APR
Your credit score is one of the most significant factors influencing the APR that a lender will offer on a loan. Lenders regard your credit score as a prime indicator of how reliable you are when it comes to repaying debts. A higher credit score typically results in the offer of a lower APR, while a lower credit score will lead to a higher APR offer.
Here’s a general breakdown of how credit scores impact APR:
- Excellent (720-850): Lowest APRs available
- Good (690-719): Competitive APRs
- Fair (630-689): Higher APRs but still manageable
- Poor (300-629): Significantly higher APRs, often leading to much higher monthly payments
If your credit score isn’t perfect, don’t worry; there are still options. Mike White Ford’s finance department specializes in helping buyers explore different financing solutions, regardless of their credit situation. However, there are also ways to improve your credit score. If your credit score is less than stellar, consider taking a few steps and a few months to see if you can improve your score before applying for an auto loan.
Flexible Financing Options at Mike White Ford
The financing team at Mike White Ford understands that everyone’s financial situation is unique. That’s why our finance department works closely with multiple lenders — including Ford Motor Credit -– to help you find a loan that fits your needs. Whether you’re looking for the lowest APR, a manageable monthly payment, or flexibility with the terms, we can help.
We also make it easy to get started. You can apply with your preferred financial institution to get pre-qualified for a loan, or we can help you explore financing options with our network of trusted lenders.
If you’re in the market for a new or used vehicle in North Idaho, Mike White Ford is here to make the financing process simple and stress-free. From understanding APR to finding the best loan for your situation, our team is committed to helping you every step of the way.
Visit Mike White Ford today at one of our showrooms in Coeur d’Alene or Sandpoint, and let us help you drive away in the car you’ve been dreaming of with a financing plan that works for you.