A motor vehicle is a very useful thing to have. Without reliable transportation, working and living would be difficult. A new car is a major purchase and an expensive one. Few people are able to pay cash when buying a car.
Fortunately, there is financing available from auto manufacturers’ credit departments, banks, credit unions, or other sources. With a down payment, you can finance the rest of the cost of the car, borrowing the money and paying it back in monthly installments. Naturally, any lender is going to make a profit and so they charge interest. You will come across the term “APR”. What does it mean and how does it affect your car loan?
APR Defined
APR stands for annual percentage rate. If you are looking for a new Honda for sale and will be financing it, there are charges that go along with the loan.
All loans have interest which is a percentage of the total amount borrowed that is paid back with the principal. APR is the total of the interest plus any fees associated with the loan per year. How much these charges will be depends on several factors unique to your situation.
Credit Score
Your credit score plays a major role in your APR or just being approved for a loan. It is a number between 450 and 850 that represents your credit history, if any. It is impacted by the amount of debt you currently have, whether you are making timely payments, and the age of your credit accounts.
A high credit score means you are a low risk for lenders and will get you lower interest and APRs on loans. People whose credit score reflects greater risk will pay higher rates because the lender is taking a bigger chance of being repaid in full.
Credit Score Classifications
Credit scores are classified by the range the number sits in.
· Excellent – 750-850
· Good – 700-749
· Fair – 650-699
· Poor – 450-649
Taking the time to build a solid credit score improves your chances of getting a loan as well as a lower APR.
Advantage of a Low APR
A low APR means a lower total cost of a new car purchase than a higher one. Your interest and fees will be less which makes for a lower monthly payment. You may also be able to pay off the loan early, which will save you money on interest. A loan with a shorter term also saves money because you will be paying interest over a shorter period of time.
Down Payment
Many loans require that you put a down payment on the car you are buying. It’s a good idea to make as big a down payment as you can comfortably afford. You won’t have to borrow as much which makes your monthly payment lower and your APR may be less because the lender isn’t risking as much money.
Check APR When Shopping
When looking for a new car that you plan to finance, shop around for the best APR as well as the best car. It’s always good to save money and APR has a big impact.