What Is an Auto Loan APR?

Auto loan APR is the interest rate at which credit is extended on an auto loan, expressed as an annual percentage rate. APR can vary from 0 percent on promotional no-interest loans to 25 percent for subprime borrowers with poor credit histories.

Identification

Auto loan APR must be clearly stated on the retail installment finance contract that is presented by a loan officer or dealership finance manager. Additionally, if a dealership is advertising monthly purchase payments, they must disclose the APR on which the advertisement is based.

Features

The auto loan APR includes all fees and interested associated with the loan. Auto loan interest is simple interest, meaning that interest is calculated only on the unpaid balance/principal.

Benefits

Low auto loan APRs allow consumers to purchase vehicles that are more expensive than they could otherwise afford. They also provide opportunities for buyers to grow their credit histories and increase their credit scores.

Considerations

If you have little credit experience or a bad credit history, be prepared for a high auto loan APR. Although the cost of a high APR may be off-putting, successful repayment of the loan will increase your credit score more than paying it off early.

Warning

Many auto loan companies advertise extremely low rates and no-interest loans. Depending on the lender, only a small percentage of consumers will qualify for these subvented APRs.

References

• Investor Glossary: APR
• The Mortgage Professor: How Does Simple Interest Work?