How to Calculate APR on an Auto Loan
When it comes to financing a car, it is imperative that you know how much it will cost you to finance that car over time. The APR or annual percentage rate refers to the amount of interest a borrower will pay a lender over the course of one year. Many auto loan companies advertise their low APR rates as an incentive for potential buyers to borrow money from them and buy a car, however what they don't tell you is that they actually use something called effective APR, which costs a little more.
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Instructions
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Get the interest rate from the car loan lender. The interest rate is different from the APR. The interest rate is the amount you are being charged to borrow money before the compounding periods begin. The compounding periods refer to the monthly payments. Lenders call this type of APR "effective APR." As an example, let's say the interest rate being charged by an auto lender is 5 percent.
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Calculate the effective APR based on the quoted interest rate. The effective APR equation is written::
(1 + rate / periods)^periods - 1
In this equation, the "rate" refers to the interest rate and "periods" refers to the number of months in the year when the loan is compounding. Since it compounds every month, the number is 12. In the example the equation would then read:
(1 + .05 / 12)^12 - 1
This would garner an answer of 5.116. So the effective APR of the auto loan would be 5.116 percent, which is higher than the quoted interest rate of 5 percent.
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Determine how effective APR costs more than the interest rate. In the equation used, if a person was financing a $40,000 car at 5 percent for a five-year period, he would need to pay $708.33 a month with just a simple interest rate. However, by using effective APR, that same person would pay $754.85 per month.Over the life of the loan, that extra $46 dollars a month would add up to over $2,750.
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