What Is APR For A Car Loan, And How Do You Get A Lower One?

Aside from buying a house, purchasing a car is one of the biggest financial decisions you can make. If you're not paying in full with cash or opting to lease, you're going to be looking at car loans. One of the most important things to understand before signing that dotted line is the Annual Percentage Rate (APR). It's a term that gets tossed around a lot in car financing, but what exactly does it mean? More importantly, how can you make sure you're getting the best one possible?

In simple terms, the APR on a car loan represents the total yearly cost of borrowing money to buy a vehicle. It includes the interest rate and also factors in additional fees and costs tied to the loan. This makes the APR a more complete measure of what you'll actually pay than just looking at the interest rate on its own.

We'll go through some of the factors at play in determining APRs, but if you're looking for a good offer, always remember to shop around and compare options from multiple lenders. Many lenders allow you to prequalify with a soft credit check, which won't affect your credit score but will give you a realistic idea of the APRs you qualify for. The more information you have, the better your chance of getting a good deal.

Your credit score makes a big difference to the APR you'll be offered. The higher your score, the lower the financial risk you pose to lenders and the lower your APR is likely to be. There's not a lot you can do to instantly improve your credit score if you need car financing right away. But, if you know what your credit score is, then it's a helpful benchmark when shopping around. Plus, looking to improve your credit score is always a good idea.

Loan term length makes a difference, too. Shorter-term loans often come with lower interest rates because the lender takes on less risk. While your monthly payments may be higher, the overall interest paid over the life of the loan is usually significantly lower. The size of your down payment can also affect your APR. When you put down a larger upfront payment, you reduce the total amount you need to borrow. 

The vehicle's age and condition can also play a role. New cars often come with low APRs because they're seen as less risky than second-hand ones that might depreciate rapidly. Some automakers even offer promotional APRs as low as 0% on new models. These deals are typically available to buyers with a strong credit score, though. Lastly, if you've already financed your car but didn't get a great APR initially, refinancing might be worth exploring if your credit score has improved since you took out the original loan.