What Is an APR?

Editor’s note: This article was last updated on Oct. 24, 2017. It has been reviewed by Cars.com Senior News Editor Jennifer Harrington and is still accurate.

APR is short for annual percentage rate, which is the amount of interest paid on a loan over a year. Simply put, if you took out a $20,000 car loan with a 5% APR, 5% of your monthly payments would go toward interest for the course of the term, while the remainder would be applied to the loan balance.

Related: How to Win the Car Financing Game

It pays to shop around for financing because interest rates vary widely, and a percentage point or two can make a big difference over the course of a loan. Generally speaking, you’ll want to find the lowest APR possible because a lower interest rate means you’ll not only save in interest, you’ll also pay less every month.

Using our $20,000 loan as an example, the payments would be $460.59 per month on a 48-month loan with a 5% APR, and interest charges would total $2,108.12. A rate of 4% would drop the monthly payment by about $9, to $451.58, but we’d also save $432.23 in interest over the 48 months, almost as much as one payment.

The lowest interest rates are often available on loans with a shorter term, but that’s something you can take advantage of only if you can afford a higher monthly payment. For example, say that instead of our $20,000 loan with a 5% APR and 48-month term, the same bank offers a 2.5% rate on the same $20,000 if it is paid off in 24 months. That would save a whopping $1,583 in interest, but the payments would jump to $855.21 per month.

There are many factors at work that will determine your interest rate, from the current economic climate to your own credit rating to the popularity of the car you’re considering. Slower-selling new cars are frequently offered at more competitive interest rates, often through the automaker’s financial arm, in an effort to boost sales.

Also remember that loaning money is a competitive business, so it’s important to compare loan rates from different banks, credit unions and car dealers. And don’t just worry about finding the lowest APR, focus on finding a monthly payment that balances the needs of your budget with the best rate you can afford. You’ll be glad you did — every month.

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