What is APR and How is it Calculated?
If you’re looking to buy that new or used car, it’s possible that you’ll be taking out a car loan.
Unfortunately, it costs to borrow money, so in addition to the principal amount you will be paying interest. Interest is expressed in the APR but isn’t quite the same thing.
Knowing some basics about interest and APR is what will help you get the most bang out of your buck when it comes to car loans.
Remember, APR is the annual percentage rate of your loan, or the amount of interest paid on the loan in one year. It’s a good tool to use when comparing the interest and fees of different loans, although it isn’t perfect.
So, have our team here at Boch Automotive break down the costs of comparative loans for you so that you can make the best financial decision for you.
It’s important to understand how APR works in order to get the most out of your loan. For this reason, knowing how to calculate it yourself to compare loans or to check your lender’s math is quite useful.
You can calculate it using spreadsheets like Microsoft Excel or Google Sheets, an online calculator, or you can do it by hand. Either way, there are two main steps:
Calculate the monthly payment for your loan
Calculate the APR using the payment you just calculated and your “amount financed”
For example, say you borrow $20,000 with a 7% interest rate, over 5 years, with $1,000 financing fees. The APR would be 9.0679%. How did we get that number?
Step One: Find the Monthly Payment
Use the formula: A = P [ r ( 1 + r ) n ] ÷ [ ( 1 + r ) n – 1]
A = the monthly payment
P = the principal
r = the interest rate per month (which is the annual interest rate divided by 12)
n = the total number of months
Step Two: Find the APR
Use the same formula as before, but instead use the amount financed (which doesn’t include prepaid finance fees) in place of the principal
Or use the Rate function in spreadsheets
Our example’s APR is 9.0679%
These calculations can get messy, to say the least. But, fear not, for there are plenty of online loan calculators to help you if you really can’t seem to figure it out.
Also, our financing professionals at Boch Automotive are well versed in the components of a car loan and would be more than happy to clear things up.
Need help comparing your financing options? Have more questions about APR or interest rates?
Contact our staff at one of our Boch Auto locations for more information or to schedule a test drive!
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