How Do You Figure Out the Finance APR Rate When Buying a Car?

What's the actual interest rate on that car loan?

So, the dealer is offering you "unbelievable" financing at a "low monthly rate," but you'd like to know what you're actually paying in interest every year. The annual percentage rate describes the interest rate applied to an entire year. There are two kinds of APR: nominal and effective. The effective APR (EAR) is the more accurate because it includes compound interest and fees. The nominal APR is what the dealer will quote you, but he might not mention that it compounds monthly. You need the nominal APR to calculate the EAR.

Things You'll Need

• Monthly payment and loan term information
• Financial calculator

Instructions

1. Carefully read your loan agreement to make sure you know the nominal APR, the monthly payments, the principal on the loan and whether interest compounds monthly or annually.

2. Enter the nominal APR into a financial calculator (see References). If your loan compounds monthly, use 12 for the number of compounding periods.

3. Estimate what you should be paying based on your area and the type of car loan you're seeking. Online resources such as Bankrate (see References) can show you nominal APRs being offered around the country as reported by banks.

References

• Calculator Soup: Effective Interest Rate Calculator
• Bankrate: Auto Loan Information