What Is APR and How Is It Different from the Interest Rate?
When you compare auto loan offers, two key numbers appear: the interest rate and the APR. The interest rate is the cost you pay each year to borrow money, expressed as a percentage–but it does not include fees charged for the loan. The APR, or annual percentage rate, is the cost you pay each year to borrow money, including many fees, expressed as a percentage. In short, the APR gives you a more complete picture of the true cost of the loan.
Because the APR includes certain fees, it is usually higher than the interest rate. When comparing offers, always compare APR to APR, not APR to interest rate, or you could mistakenly think a loan is cheaper than it actually is.
- The interest rate: the cost of borrowing expressed as a percentage, not including fees.
- The APR: the cost of borrowing expressed as a percentage, including many fees.
- Federal law requires lenders to disclose the APR before you are legally obligated on the loan.
Sources: Consumer Financial Protection Bureau
Common Upfront Fees: Origination, Documentation, Processing
Many auto loans come with fees at the start of the loan. These can include origination fees, documentation fees, and processing fees. There is no standard set of fees or fixed dollar amounts across lenders–they are set by the lender or dealer and can vary widely. Because these fees are often included in the loan amount, they increase the total amount you finance and the amount of interest you pay over time.
Even though fees increase the APR, the APR does not always capture every single fee. Some charges, such as late fees, are not included in the APR. This is why you need to read the loan contract carefully and ask the lender about all fees that apply.
Sources: Consumer Financial Protection Bureau
Ongoing Fees and Charges: Late Payment, NSF, Prepayment Penalty
Beyond upfront fees, ongoing charges can occur during the life of your auto loan. For example, if you make a late payment, you may be charged a late fee. Similarly, if a payment is returned for insufficient funds (NSF), you might incur an NSF fee. These fees can add up and increase your total loan cost.
Another potential charge is a prepayment penalty–a fee some lenders impose if you pay off the loan early. Not all lenders charge this, and the rules vary. Ask your lender directly whether a prepayment penalty applies to your loan.
- Late fees: charged when a payment is not made by the due date.
- NSF fees: charged when a payment is returned due to insufficient funds.
- Prepayment penalties: charged for paying off the loan early, but not all lenders impose them.
Sources: Consumer Financial Protection Bureau
How Fees Affect Your Total Loan Cost
Fees affect your total loan cost in two main ways. First, they add directly to the amount you owe, either by being added to the loan balance or paid out of pocket. Second, when fees are added to the loan balance, you pay interest on them over the life of the loan. This means a seemingly small fee can grow significantly by the end of the loan.
The APR is designed to reflect the combined effect of interest and many fees, making it a valuable tool for comparing offers. However, because not all fees are included in the APR, you should still review the loan paperwork for the complete picture.
Sources: Consumer Financial Protection Bureau
How to Compare Loan Offers Using APR and Total Cost
To compare auto loan offers, look at the APR, the interest rate, the length of the loan, and the total amount financed–not just the monthly payment. A longer loan term can lower your monthly payment but increase the total interest paid over the life of the loan. For example, with a $20,000 loan at a 4.75% interest rate, a 60-month term results in a $375 monthly payment and $2,508 in total interest, while a 72-month term results in a $320 monthly payment and $3,024 in total interest.
These numbers show that comparing only monthly payments can be misleading. Lower monthly payments are not always cheaper overall. Use the APR to compare the overall cost of loans from different lenders, and also consider the total interest paid for the term you choose.
- Compare APR to APR, not APR to interest rate.
- Look at the total interest paid over the loan term, not just the monthly payment.
- Shorter loan terms reduce total loan cost, while longer terms lower monthly payments but increase total interest.
| Loan term | Monthly payment | Total interest paid |
|---|---|---|
| 60 months | $375.14 | $2,508.29 |
| 72 months | $319.78 | $3,024.48 |
Sources: Consumer Financial Protection Bureau
Ways to Avoid or Reduce Unnecessary Fees
Negotiating can save you hundreds or even thousands of dollars over the life of your auto loan. Before signing, ask the lender or dealer to explain every fee and whether any can be reduced or waived. Some fees are discretionary, and it never hurts to ask. Also, avoid actions that trigger fees: make payments on time to prevent late fees, and ensure you have sufficient funds to avoid NSF charges.
Because prepayment penalties vary, ask about them upfront if you plan to pay off the loan early. Even if a penalty exists, the total interest savings from early repayment might still outweigh the fee–so run the numbers or ask the lender to calculate the total cost under different scenarios.
- Negotiate fees: ask for reductions or waivers on origination, documentation, or processing fees.
- Make payments on time to avoid late fees.
- Keep sufficient funds in your account to avoid NSF fees.
- If you plan to pay off early, ask whether a prepayment penalty applies and weigh the cost against interest savings.
Sources: Consumer Financial Protection Bureau
decision-criteria matrix
To make an informed decision, compare loans not just on the interest rate but on the APR and total cost. The following matrix outlines the key factors to evaluate for each loan offer you receive.
| Factor | What to look for | Why it matters |
|---|---|---|
| APR | Lower APR means lower overall cost, but ensure you compare APR to APR. | Includes interest and many fees, giving a truer cost picture. |
| Interest rate | Lower rate reduces interest charges, but it does not include fees. | Part of the APR; a low rate alone may not mean a low-cost loan. |
| Loan term | Shorter terms increase monthly payments but reduce total interest. | Longer terms lower monthly payments but can cost thousands more in interest. |
| Total amount financed | Know the full amount you are borrowing, including any fees added to the loan. | Fees added to the loan increase the balance and the interest you pay. |
| Fees | Ask for a complete list of all fees, including origination, documentation, processing, late, NSF, and prepayment penalties. | Fees can significantly increase total loan cost if not accounted for. |
Sources: Consumer Financial Protection Bureau
Frequently asked questions
What is a good APR for a car loan?
There is no single 'good' APR that applies to everyone. APRs vary based on your credit history, the type of lender, the new or used status of the car, and market conditions. The best approach is to compare offers from multiple lenders using the APR, as it includes both interest and many fees. For borrowers with subprime credit, interest rates can range from about 9% to 20% annually, according to the CFPB, so your 'good' APR depends on your personal situation.
Sources: Consumer Financial Protection BureauCan I negotiate the origination fee?
Yes, it is often possible to negotiate fees such as origination, documentation, or processing fees. The CFPB notes that negotiating can save you hundreds or even thousands of dollars over the life of your loan. Ask the lender to reduce or waive the fee, and compare offers from different lenders to see which ones are willing to negotiate.
Sources: Consumer Financial Protection BureauAre there any fees I can refuse?
Some fees are not required, and you can often refuse them by negotiating or choosing a different lender. Fees like origination, documentation, and processing are set by the lender and may be negotiable. However, some costs, such as government fees like taxes and title fees, are unavoidable. Always ask for a breakdown of all fees and question any that seem excessive or unnecessary.
Sources: Consumer Financial Protection BureauDo all lenders charge the same fees?
No, fees vary by lender and by loan. There is no standard fee schedule across the industry. Lenders can set different origination fees, documentation fees, and other charges. This is why it is important to ask each lender for a complete list of fees and compare offers side by side, using the APR as a common measure.
Sources: Consumer Financial Protection BureauSources
- Auto loans key terms — Consumer Financial Protection Bureau
- How do I compare auto loan offers? — Consumer Financial Protection Bureau
- Auto loans | Consumer Financial Protection Bureau — Consumer Financial Protection Bureau
- Rising car prices means more auto loan debt — Consumer Financial Protection Bureau