APR vs Interest Rate: How They Impact Your Car Loan Costs

What Are APR and Interest Rates?

The APR, or annual percentage rate, and interest rates, are both numbers associated with your loan, shown as a percentage. However, different factors make up each number.

Your interest rate is how much it costs to borrow money, expressed as a percent. It is simply the rate you will be charged and have to repay over and above the amount of the loan.

APR, on the other hand, is the cost to borrow money for an entire year, including fees. These additional costs are not included in the interest rate.

Key Differences Between APR and Interest Rate

The only difference between an annual percentage rate and an interest rate is that the APR takes fees into account. This means that your APR is likely to be higher than your interest rate, especially if there are significant lender fees.

Impact on Monthly Payments

APR has a bigger impact on your monthly payment since it takes into account additional things like dealer document fees. The interest rate just tells you what percentage of the loan you're going to pay in interest. The APR is a more true calculation of the total cost.

Impact on Total Loan Cost

To understand how the APR and interest rate impact your total loan cost, it's important to know what goes into that figure. Principal, interest charges, taxes, fees, extras, APR, all of these things are factors in the total cost of a loan. Here's a look at some terms you should know when it comes to a car loan:

• Principal: On a car loan, the principal is the amount you borrow and agree to repay when you buy a car. It includes the purchase price of the vehicle plus any additional charges and fees rolled into the loan.
• Interest rate: This is how much it costs you to borrow the principal, expressed as a percentage. The average interest rate for bad credit borrowers among our dealer network is typically around 13%, though your interest rate depends on your specific situation and the lender you're working with.
• Interest charges: These accrue daily based on your current loan balance. Less accrues after each payment since interest is repaid first before any money is applied to the principal. The fastest way to save money in interest charges is to decrease your principal as much as you can, as fast as you can.
• APR: The amount you're charged on your loan for the whole year, based on the total loan amount, including all fees and extras.

Why Do Both APR and Interest Rate Matter?

Both the interest rate and APR matter in your car loan because they are both factors you need to know. You need to know your interest rate to calculate your APR, if necessary. You also need to know your interest rate in order to determine what your daily interest charges are, but you need your APR to calculate the overall cost of your loan.

How to Use APR and Interest Rate to Your Advantage?

There are many ways you can take advantage of interest rates to help yourself get the loan that works for you. Here are a few tips on shopping and negotiating your loan for the best interest rate you can get.

Tips for Choosing the Best Loan

To get the best loan you can with the best possible interest rate for your credit score and the best terms for your monthly cost, it's a good idea to rate shop before you commit to a lender. You can apply for the same type of loan within two weeks, and the credit bureaus know that you're comparing rates. This allows for a lower impact on your credit score than spacing out your inquiries over time.

When you're rate shopping, you can compare the interest rates and loan terms you're offered by several dealerships, banks, and credit unions, so that you can pick the deal that works best for your budget. Focus on the APR for total cost comparison in these cases. Remember, the APR includes all the fees associated with the loan, so it gives you a better sense of the actual overall cost.

However, you need to be wary of taking on a loan that has high fees. Even if your loan is at a lower interest rate, higher fees on top of the loan amount can make for a much higher APR than you bargained for. We recommend comparing at least three loans when you're rate shopping. Also, start with your credit union if you're a member in good standing, they typically have the best deals for their members.

Negotiating Loan Terms

To get the best rates and terms on your auto loan, it's a good idea to negotiate upfront with your lender. This isn't always easy, and some things have fixed prices, but often there are ways to lower your costs if you know how to haggle.

To get the lowest interest rate you can, you may be able to negotiate your loan term with the dealer or your down payment amount. However, interest rates are set by the lender, and usually depend on your credit score. While you may have some wiggle room, you may not be able to talk your way into a super-low interest rate. This is especially true if you have bad credit.

Getting a lower interest rate on a loan once you have it isn't always easy, and it isn't something you can do right away. To change the interest rate on your auto loan, you need to refinance.

This can usually be done through a different lender, but sometimes your original lender may be willing to help you refinance your vehicle. There are a lot of factors that go into refinancing, such as whether or not your credit has improved and if you've kept your loan in good standing for at least a year.

While these things mentioned here are possible, it typically takes a good credit score to accomplish these goals. So, when you're struggling with credit issues, it's important to stay on top of your loan and try to improve your credit in as many ways as possible.

FAQs

What’s a good APR for a car loan?

A good APR on an auto loan depends on your situation and your credit score. While a "good" APR is typically considered to be around 4% or lower, it can be very difficult for people with lower credit scores to get that type of rate.

So, the best way to look at APR is to find out what the best APR for your credit situation is. According to Experian, the average APR for borrowers with excellent credit was around 4.88% for the third quarter of 2025, while the average interest rate for people with the lowest credit scores was around 15.85%.

The current average new car interest rate for subprime consumers is around 13%.

Can I negotiate the APR with lenders?

Yes, you can negotiate your APR to a certain extent, but the APR that you're offered by a lender is dependent on your credit score, and you may not be able to talk it down too far.

Some things that you can bargain with to get a lower APR may include a shorter loan term, providing a higher down payment, or choosing a less expensive vehicle to purchase.

Is it better to have a lower interest rate or APR?

When it comes to comparing auto loans, you want to have a lower APR, since loan terms are typically longer and take fees into account. Remember that an APR is a more accurate depiction of what you'll pay overall for a loan. The longer the loan, the lower you'd ideally like your APR to be.