What Does APR Stand For?

May 17, 2022

What Does APR Stand For?

Buying a vehicle can be an endeavor. If this is a consumer’s first car shopping experience, the process can seem overwhelming and maybe even slightly stressful. Buyers have to figure out their budget and decide what car is best for their needs.

The perfect car might not even be available when inventory is low. In addition, buyers also have to decide how they want to pay for their purchase. More than 80 percent of car buyers finance their vehicle. However, loans vary and many buyers might notice that APR isn’t consistent. What does APR stand for and why is it an important acronym in the financing process?

What Does APR Stand For

Deciphering APR

The acronym APR stands for “annual percentage rate.” This refers to a loan’s interest rate. The APR can be impacted by the market, the consumer’s credit worthiness or risk and/or perhaps even the length of the loan, too.

According to Investopedia, “APR is calculated by multiplying the periodic interest rate by the number of periods in a year in which it was applied.” In addition, the site explains that lenders need to disclose the APR as required by the Truth in Lending Act.

For this reason, car buyers will be able to review their APR of the loans that they are considering. They can review their options to decide which loan offers the best interest rate (per the listed APR), or they might gravitate towards the loan with the lowest payment or maybe even the best terms.

What Does APR Stand For

Why is APR Higher?

Car buyers shopping for a new car might notice that last year’s posted interest rates might have been lower than those advertised now. The same is true for mortgage rates.

When the Federal Reserve raises interest rates, this often reverberates to consumers. Interest rate hikes can lead to higher borrowing costs for consumers purchasing a new or used car.

In addition, the consumer’s credit score also impacts the interest rate they receive from a lender. To better understand their credit scores, consumers can request a credit report. Every 12 months, a consumer can receive a free report.

When reviewing a credit report, consumers should look for any errors in their credit. In addition, they should pay attention to their credit score. The score on free reports might not mirror the exact numbers that lenders see, but they should be close.

A high credit score can help consumers get more favorable interest rates. Those with poor or low scores might need to work on trying to repair their credit; however, the scores also could prepare them for higher rates.

The interest rate of a loan also could be influenced by the length of the loan. According to NerdWallet, car loans beyond five years have higher interest rates. In addition, long loans also will mean that the consumer will pay more in interest over time; the principal is divided into more payments, but the interest payments extend longer, too.

Getting Pre-Qualified or Pre-Approved to Understand Rates

Car buyers shopping for a loan might have the option to get pre-qualified or pre-approved online. These two terms do not mean the same thing, although some may use the terms interchangeably.

Typically, getting pre-qualified for a loan doesn’t require the consumer to enter a social security number. Pre-qualification is known as a soft credit inquiry and, for this reason, shouldn’t impact a credit score. Consumers will need to enter basic data related to their housing costs, their work history and income.

Once the consumer inputs this information, the site might show loans for which the consumer might qualify. Then the individual can review potential interest rates, monthly payments and loan terms.

Pre-qualification doesn’t mean that the individual has been approved for the loan. Consider pre-qualification as more of an informational resource to consider loan options.

Some sites might conflate pre-qualification and pre-approval, though. They might require more information like a social security number. If a consumer feels uneasy about entering information, don’t continue with the process. Instead, reach out to the business to inquire if entering information will impact the credit score or be considered a ‘pre-approval’ for the loan.

Standard pre-approvals will typically ask for more detailed information from the applicant. For car loans, Experian explains that tax returns, proof of income and other documentation might be required. Pre-approvals for mortgages and car loans often will impact a credit score; credit inquiries are part of credit score compilations, however inquiries done at once are often considered one inquiry. This can get confusing, and consumers should talk to a lender if they have questions.

Experian notes that these credit inquiries will only appear on a report for a few months and won’t have a big impact. Again, though, if consumers are confused or concerned about the process, they should reach out to the lender before proceeding.

What Does APR Stand For

APR, Loan Lengths and Monthly Payments

Every consumer is different regarding their loan preferences. For example, some buyers need the lowest payment possible to afford a vehicle. This might mean that they are ok with accepting a longer loan term (even if the rate is slightly higher).

Other car buyers want to own the car as soon as possible. They might look for a three-year loan and tackle higher payments to ensure that they aren’t stuck with an extended loan (and years of car payments).

However, buyers also might understand that they have many choices when applying for financing for a new car. They can compare rates offered by their bank or another financial institution. Some credit unions or banks could offer a better interest rate than the dealership might offer.

There are times, though, that dealerships offer promotions that a bank can’t beat. In the past, dealerships were able to offer 0 percent financing to qualified buyers.

These buyers might have been consumers with outstanding credit; the loan also could have included a set loan term. This might have meant that even with the 0 percent interest, payments might have been too high for some buyers (who needed longer loans to lower the monthly payments).

Some websites let consumers search different lenders to find the best loan for their needs. Again, some buyers want the lowest APR, others want the lowest monthly payment. These sites can help buyers find a loan that works for their financial situation.

Down Payments Can Help Lower Monthly Payments

While the APR influences the monthly payment and can lead to buyers paying more or less for their car each month, there is another aspect of the buying process that can help buyers lower both their purchase price and perhaps their monthly payment, too. Down payments and even the amount of a trade-in can help offset the final purchase price of a vehicle.

Down payments also can help lower the impact of depreciation when purchasing a new car. Experts recommend that buyers allocate 20 percent of the purchase price for the down payment; if the car price is $30K, the down payment should be $6,000.

Since the value of a vehicle can depreciate about nine to 11 percent once a car owner drives their new car off the lot, a good down payment can be important to ensuring that a new car doesn’t immediately go underwater. The term ‘underwater’ refers to the loan balance being higher than the value of the vehicle.

In addition to a down payment, some car buyers also might have a vehicle to offer the dealership as a trade-in. However, before visiting the dealership, car owners should research the value of their trade-in vehicle via Kelley Blue Book (KBB).

The site will ask the owner to enter the VIN, license plate number or just the make/model/year of the vehicle. Then the owner will need to select the vehicle’s trim as well as any options or upgrades (or they can simply select the base). They also will need to note the condition of the vehicle; KBB explains each condition category to understand each option.

Car owners can then review either the trade-in value of the vehicle or the resale value. The resale value will be higher than the trade-in value, as the price of the trade-in needs to account for the dealership’s profit margin.

Once car owners understand the value of their trade-in, they can be in a better negotiating position. However, buyers should be honest about the condition of their vehicle. Trying to boost the value of the vehicle by selecting a better condition won’t do much good at the dealership; they know the difference.

Understand APR and All the Loan Details

While the APR of a loan influences the monthly payment and how much the buyer will pay for the vehicle over the life of that loan, some buyers might need longer loans to afford the car they need.

When choosing financing for a vehicle, consumers should understand how much they can feasibly spend each month. They need to review their budget and their income and expenses. Experts recommend that a car payment should be less than 10 percent of a consumer’s monthly take-home pay. However, some may be able to afford more or less.

Ultimately, buyers need to know how the APR impacts their monthly payment. They can shop around for the best rates and review all their options. In addition, car buyers should never be afraid to ask questions during the process.