Difference Between Interest Rates And APR For Auto Loans

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If you’ve ever taken out a car loan, you know that interest rates are one of the most important factors. But what exactly is an interest rate? How is it different from APR? In this article, you’ll learn how refinancing a car loan with bad credit work and how both figures are calculated.

The Basics of Interest and Why It Matters

Both interest rates and APRs are percentages that measure the cost of borrowing money. The difference is that APR includes other costs like closing costs and loan origination fees. So when you see an auto loan advertised as having a 4.5% APR, it will cost you $45 in interest for every $1000 you borrow throughout your loan. If the same lender advertises a 7% interest rate, it means that if you borrow $10,000 at 7%, it will cost you $700 in interest over the life of your loan.

APR is more expensive than the interest rate because, besides interest charges on the principal balance (amount owed), additional fees are included in APR calculations, such as origination fees and discount points charged by lenders upfront at closing.

Interest rate vs. APR

The difference between interest rate and APR is that the interest rate is an annual percentage rate, while the APR is a monthly percentage rate. The interest rate is the actual rate that you are charged each month. For example, if your loan has an interest rate of 6%, you will be charged $60 in interest every month for every $1,000 borrowed.

The APR considers other factors, such as the cost of borrowing and origination fees, in addition to just the simple annual rate. For example, the lender uses this number to determine how much they have to charge to cover all their costs and earn a profit.

How an interest rate is calculated

Interest rates are the price you pay for borrowing money. They’re a big deal—they determine how much you’ll have to repay and how quickly.

The interest rate can be expressed in two ways: nominal interest rate or effective interest rate. Many people get these confused, but they’re very different. The nominal rate is what’s listed on your loan contract; it’s just an annual percentage number that shows what percent of your balance you’ll pay off each year.

“But if you had a “bad” credit rating when you got the car loan, that interest rate might have seemed like the best option you could get,” explains Lantern by SoFi experts.

How an APR is calculated

APR stands for Annual Percentage Rate. APR is the total cost of borrowing and is derived by adding up all fees, charges and interest over the life of your loan. It’s really a better indicator of how much you’ll pay to borrow than its counterpart — the interest rate.

The difference between an interest rate and an APR isn’t just academic: it can be costly if you don’t understand them both well enough to avoid getting ripped off during the auto purchase process.

The APR is the annual percentage you will pay on your auto loan, including all fees associated with the loan. The interest rate is the actual cost of borrowing money from a lender, based on how much you borrow (loan amount) and how long it takes to repay the funds.

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