How to calculate APR on a car loan

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In a Nutshell

The annual percentage rate on a car loan is the annual cost you’ll pay to finance a vehicle — including fees — shown as a percentage. Lenders are required to disclose the APR they’re charging you before you finalize a loan. You can also calculate the estimated APR yourself, using loan amount, interest rate and fees, and loan term. The APR you’re offered can vary by lender, so it’s important to shop around and compare loan APRs and other terms.

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Between choosing a make, model and options, shopping for a car can feel overwhelming. And you’re not done there. Car loan shopping is just as important — and knowing how to calculate the APR on an auto loan can help you determine whether a loan might be right for you.

The more you know about how to calculate the APR on a car loan, the more informed you’ll be when it’s time to either sign on the dotted line — or walk away if the loan doesn’t fit your financial needs.

A car loan’s APR is the cost you’ll pay to borrow money each year, expressed as a percentage. It includes not only the interest rate on the loan but also certain fees. The interest rate, on the other hand, reflects only the annual cost of borrowing the money — no fees included. When comparing loans, the Consumer Financial Protection Bureau suggests looking at APRs versus interest rates, because APR more accurately reflects how much you’ll pay to finance a car.

Let’s take a look at how to calculate APR on a car loan and some of the factors that could affect the APR you’re offered.


How do I know what my APR is?

Once you’ve received a formal and final offer on a loan, you can find out what the APR is in one of two ways.

  1. Ask your lender. The federal Truth in Lending Act, a law that helps ensure consumers are informed, requires lenders to give you certain information on your loan, including the APR, before you sign the loan agreement. If you have the loan documents in hand, you should be able to find the APR on your contract.
  2. Estimate it yourself. If you have the loan details on hand, the easiest way to calculate the estimated APR on an auto loan is with a computer spreadsheet program. Check out the formula for how to calculate the APR on a car loan below.
How interest on car loans works

How do I calculate APR on a car loan?

To calculate the estimated APR on a car loan, you’ll need the following information:

  • Loan amount — The total amount you plan to finance, typically the price of the vehicle, minus any down payment or trade-in (a down payment or trade-in will lower the amount you need to finance, which can reduce your monthly payment)
  • Loan term — The length of your auto loan
  • The loan’s interest rate (this is an estimated rate until you formally apply)
  • Certain fees, like origination fees

The first step in calculating APR yourself is calculating your estimated monthly payment.

1. Calculate your monthly estimated payment

If you already know your estimated monthly loan payment, you can skip this step. If you don’t, you can easily estimate your monthly car payment on a spreadsheet by typing the formula below into a cell.

=PMT(interest rate as a decimal/12, number of months in loan term, loan amount, with fees)

The result is your estimated monthly payment. It will be a negative number, but don’t worry. You didn’t make a mistake. Keep this number handy for calculating your APR.

Let’s say you want to finance $13,000 ($12,500, plus a $500 loan application fee) with a loan term of 60 months and an interest rate of 4%. Here’s what your formula would look like with those numbers plugged in.

=PMT(.04/12, 60, 13000)

Using this example, your spreadsheet would calculate your monthly payment to be $239.41.

2. Calculate your estimated APR

To estimate your APR on the loan using a spreadsheet, enter the formula below into a cell.

=RATE(number of months in loan term, estimated monthly payment, value of loan minus fees)*12

Using the monthly payment you calculated (-$239.41), here’s what you’d enter into the cell for this loan example.

=RATE(60,-239.41,12500)*12

Entering the formula above would calculate your estimated APR at approximately 5.6%.

Why is APR important?

Knowing the APR on a car loan is important because it helps you understand how much borrowing money from that lender will cost you. The lower the APR, the less you’ll pay to finance your car.

When comparing loans side by side, pay attention to the APRs to help identify the least expensive loan. The difference of even just one percentage point can add up over time.

For example, let’s say you’re comparing two $23,000 loans, each with a four-year term. One loan has a 5% APR and the other has a 6% APR. You’d end up paying $503 more in interest on the loan with the 6% APR than you would on the loan at 5% APR.

What’s a good car loan APR?

In August 2019, commercial banks charged an average APR 5.27% on 48- and 60-month car loans, according to the Federal Reserve. But keep in mind that interest rates vary by lender, and a range of other factors can affect the APR you’re offered. Here are a few.

Your credit scores

The better credit you have, the lower your loan rate is likely to be. Check your credit scores before you shop for a car so that you have a good idea of where your credit stands overall.

Your guide to credit score ranges

Your loan term

A longer loan term, like 72 or 84 months, can lower your monthly payment, but may come with a higher interest rate than you’d get on a shorter-term loan. And with a longer term, you’ll end up paying more in interest over the life of the loan.

Your loan-to-value ratio

If the amount you want to borrow is significantly less than the value of the car you’re buying — maybe because you made a sizeable down payment or have a car with a substantial trade-in value — you may be charged a lower APR. This is because the loan is less of a risk for the lender than a loan to finance the full amount of the car’s value.


What’s next?

Learning how to calculate APR on a car loan can come in handy when you’re auto loan shopping. Before you sign any loan paperwork, make sure you know the loan’s APR — it’s critical to understanding how much you’ll pay to borrow money from that lender.

Interest rates and fees vary from lender to lender. That’s why it’s important to shop around and compare quotes before settling on a loan. Prequalification can help you get a sense of the rate and loan terms you might qualify for and identify which lender may be the best fit for your financing needs.