What does the APR express?

What does the APR express?

6 January 2020 Concept Car

When it comes to buying a car on finance, you will often hear the term APR thrown around a lot. Indeed, the APR is one of the most fundamental decision criteria for any loan.

In this short but concise overview, we’ll fill you in on everything you need to know about the APR – and what, exactly, it means for you.

APR: Definition

The abbreviation APR stands for Annual Percentage Rate. It expresses how much, percentage-wise, you’re paying for your car loan on a yearly basis.

The APR includes more than just the interest you’re paying.

As Cashfloat describes it, it’s “the interest rate in addition to fees and charges over a whole year as opposed to monthly interest rates.”

Or, to put it in even simpler terms:

The higher the APR, the more expensive a car loan.

Why do you need the APR?

The APR has two important benefits.

For one, all financial services providers are required to provide it. This allows you to compare their offers.

Secondly, it offers a far more realistic perspective on how much you’re really going to be paying for a loan.

Imagine the following case: A car dealer is advertising a loan with a 1% monthly loan. This sounds too good to be true. But on an annual basis, you will be paying 12%. Depending on the size of the loan, this can be quite a lot of money!

This is one of the reasons why we advise so strongly against payday loans for buying a car. Their daily percentages may sound fine. When applied to a full year, however, they’re truly astronomical.

How to calculate the APR

As mentioned, car dealers actually have to tell you the APR when offering you a loan. So, in principle, there is no need to work it out yourself.

In some cases, however, you will want to run through a few loan options at home, ahead of the negotiations. The idea is to work out the impact of different loan terms, downpayments, overall loan size etc.

In this case, you’ll need to be able to calculate the APR for your various options. Theoretically, you could use the formula provided by the FCA. This, however, requires a degree in algebra and a lot of time. It has also been criticised for only applying to a certain category of loans (compound loans).

So to save yourself a lot of time and pain, use our free online car finance calculator instead. You’ll get results within seconds.

A warning: Representative APR

We’ve mentioned why the APR is so useful. However, here’s a caveat: The APR you’ll see in loan ads is not likely going to be the APR the dealer will actually offer you.

This sounds absurd. But there’s a certain logic behind this. Obviously, every loan depends decisively on the financial situation of the applicant. The more debt you have and the worse your credit rating, the higher the APR will be. So a dealer can not give out a single APR for all potential buyers.

Instead, what they’ll do, is give you the average percentage rate for their loans. This rate applies to 51% of all deals. But it may differ significantly from what you’ll get if your finances are better or worse than average.

There is nothing fundamentally wrong with this. As long as you’re aware of the fact that you may not get what’s in the glossy sales folder.

APR compared to other factors

One could argue that the APR should be the only thing to base your decision for a loan on. And some financial experts are actually doing just that.

However, we strongly recommend you take other factors into account as well.

For one, the cheapest deal may not necessarily be the best deal for you. How so? Well, a cheaper loan will always be a loan with a fairly short loan term. The lower your APR, the higher your monthly contributions. Essentially, you’re paying your loan off faster. And the higher your monthly payments, the higher your chances of defaulting on your loan.

Secondly, there are other things to be considered, as well: The reputability of the dealer, its service quality, the general terms and conditions of the loan.

APR versus monthly rate

This is why we advise to first see what you can actually pay on a monthly basis before looking at the APR. If, for example, you know you can only afford £150 each month, then this should be your point of departure.

Granted, you may need to pay a less favourable APR in that case. On the other hand, you can rest assured you can actually meet your financial obligations.

What about 0% deals?

You will sometimes see ads for 0% deals. Contrary to what you might expect, these do not need to be disreputable sales tactics. You’re nonetheless better off not wasting too much time thinking about them:

  • 0% deals only apply to new cars, never used ones.
  • They’re reserved for buyers with a stellar credit history.
  • They will usually apply to the first few months of a loan only. After that, a more typical higher APR kicks in.
  • The 0% do not relate to the APR, but the interest rate. Obviously, the dealer will want to make money off the deal, so there are still costs involved. You merely won’t be paying interest on the loan.

If you’re a regular mortal human being with an at best average credit rating, then a 0% deal just won’t happen.

How to keep the APR as low as possible

You can still do quite a bit to keep the APR as low as possible. Here are a few of our recommendations to get a great deal:

Improve your credit score. This can be done using a few simple steps and is even within your reach if you’ve faced serious financial problems in the past.
Increase your downpayment. This is not as impossible as it may seem. If you don’t need the car right away, put aside some money at the end of each month towards buying a car. The downpayment can have a significant positive effect on the overall costs of a loan.

At Concept Car Credit, we’ll work with you in order to achieve both: A loan with affordable monthly instalments and at a reasonable APR. Talk to us now to see if you’re eligible. You could get a confirmation within hours.

6 January 2020 Concept Car