Financing a vehicle purchase offers a convenient and affordable way for many people to get on the road. In return for those benefits, there are some borrowing costs involved and two of the most important are interest rate and annual percentage rate (APR). Knowing the difference between them and how they affect a loan can help you make both an informed and budget-friendly buy.
Interest rate and APR
Interest rate: The cost of borrowing money from a lender. An interest rate is charged on the principal loan amount, which is the sum you borrow to finance a vehicle.
APR: This is the overall cost of borrowing including the interest rate and additional fees charged with the financing, such as the origination and documentation fees.
Is it better to have a lower interest rate or APR?
It’s a case of the lower the better for the interest rate as well as APR because, together, they affect how much you will spend on your purchase. However, by taking into account added fees, APR provides the most accurate expression of your financing costs.
If you’re checking out the costs of different loan options, remember to compare interest rate to interest rate and APR to APR, rather than comparing the interest rate for one to the APR of another, so that you make a proper comparison.
How to get a lower rate
A lender will offer a qualified loan applicant an interest rate based, in part, on the risk involved in lending to them. Here are some approaches to help lower the risk and get a favorable rate.
Improve your credit scores
Credit scores, based on credit history, are a key factor in most lending decisions. Higher scores are associated with lower rates and there are several ways to improve your credit habits and potentially raise your scores. The Consumer Financial Protection Bureau recommends:
• Paying your bills on time, every time
• Using no more than 30% of your total credit limit
• Disputing and correcting any errors on your credit reports
• Only applying for the credit you need
• Maintaining good credit habits over time
Make a down payment
Any money you can put down, including the value of a trade-in, will reduce the amount you need to borrow and, in turn, lower the risk for a lender.
Consider a vehicle’s age
Financing for new vehicles tends to offer buyers lower rates than for used ones. Why is that? Should you fail to make your car payments and the lender attempts to repossess and then resell the vehicle to recoup the money it’s owed, a vehicle that was bought new will have a more predictable resale value.
Think about loan duration
Longer loans generally come with higher interest rates than shorter loans as the lender will have a lengthier wait to get their money back.
Team up with a co-applicant
Remember that you don’t have to go it alone. If your credit scores are low, for example, you may want to apply for financing with a creditworthy co-applicant to improve your borrowing position.
Shop real rates and payments
When you’re ready to purchase a new or used vehicle, see if you pre-qualify with Drive®, by Santander®. Pre-qualification is quick and easy, there’s no impact on your credit scores and it’s a smart way to set your expectations before completing a full financing application.
If you pre-qualify, you can use the Budget Customizer to learn more about your financing options and shop for a vehicle that fits your budget. Then, if all your details check out at the dealership, you’ll receive the exact terms in your pre-qualification.
