If you’re new to the car buying process, you might have experienced a little confusion around some of the finance terminology.
One term you’ve likely come across in your search is APR. While you might be tempted to brush this off as another term for interest, there’s a little more to it than that.
To help you understand what APR is we’ve broken down everything you need to know about car finance APR.
What is APR for cars?
APR stands for Annual Percentage Rate and directly relates to the costs involved in financing and buying a car.
At its simplest level, car finance APR is the annual rate of pay of your agreement, including all costs associated with the purchase. This includes the annual interest on a loan, as well as the money you borrowed and additional fees charged that might not be immediately obvious.
While APR does include interest, the calculation also includes all loan fees, giving you a clear idea of how much you’ll pay in total for car finance, rather than simply the cost of interest.
What does APR mean for a car purchase?
Legally, all credit agreements must have a clear APR associated with them, displayed in an obvious manner on any associated documents.
When you’re deciding what car to purchase or car finance option to choose, the APR will allow you to look at all the costs totalled together for an accurate overview of what you’ll pay - and what this would potentially look like on a month-by-month basis.
Essentially, having knowledge of your APR makes it much easier to budget your finances and enables you to more accurately research and compare various finance deals to find the right one.
Car finance APR: representative APR vs exact APR
When it comes to car finance APR, there are two types you need to be aware of in order to understand exactly what costs you’ll be paying.
The most common type of APR you will initially see is known as representative APR. Representative APR is a suggestion of what your APR percentage will be, based on what the lender typically offers to at least 51% of their customers.
While representative APR can provide a good initial estimate for overall costs, its generic nature means you shouldn’t rely on it as an accurate percentage.
Instead, you should gain an actual APR based on your personal circumstances. As APR is related to credit and lending, the specific percentage of your APR will be related to your credit rating and current financial situation.
Actual APR provides a more accurate view and allows you to better-budget your loan and pick the right finance option for your specific situation. The credit check associated with APR is also a ‘soft credit check’, which is hidden from other lenders, so you don’t need to worry about it affecting your credit rating.
What is a good APR for a car?
Unfortunately, there is no exact way to tell what a good overall APR for any car is. A lower APR is usually a good sign as it means you pay less.
Generally speaking, the better your credit rating is, your lender will tend to offer you a lower APR, so your costs will be less overall. For deals with PCP car finance and HP car finance, we offer APR starting from 7.9%.
How to calculate APR on a car loan?
The calculation for APR is conducted using a standard method that is adhered to by all lenders. You can find calculators online that will be able to estimate APR for you, but for a truly accurate representation of your potential APR rate, it’s best to have a professional calculate it for you.
As mentioned, an accurate APR rate requires a credit check, meaning you won’t be able to make an accurate APR estimation for a lender without first undergoing other steps, at which point it will likely be easier to have the lender calculate your APR for you.
Having a lender calculate your car finance APR ensures the rate will be accurate and nothing is missed, and will even give you a clear indication of how your APR might differ between potential lender options.
The best way to find the APR rate that suits your specific financial needs is to compare a range of like-to-like quotes on different car models while opting for the same criteria with each loan. With this in hand, you’ll be able to see what every lender has to offer and pick the right APR for you.
Get an estimation on your APR today by using our quick and easy car finance calculator. We offer car finance APR rates from 7.9%, and our expert team are happy to work with you to broker the best APR deal for your needs.
Get in touch today to see how we can help you with your car finance, and don’t forget to visit the Zuto blog for more articles like this one.