How does APR work on a car loan?

I think I understand what APR is, but I’m not sure how it works for a car loan. Is it the same as an interest rate?

APR works almost the same way on a car loan! Just like APR (or the Annual Percentage Rate) on other loans, a car loan’s APR includes the interest rate and any additional fees you’ll have to pay each year. In general, 2.49% is considered a good APR. That said, it varies depending on your credit score. APR can work in two ways:
  • Simple interest. For these types of loans, APR is calculated by the remaining amount of principal (the loan amount before interest and fees) that remains after each payment. You’ll pay less of the APR and more of the principal as your loan ages.
  • Precomputed interest. For this, the APR is divided evenly across all loan payments. If your loan has precomputed interest, you’ll pay the same amount of interest and principal each time. Making early or large payments won’t save you money on interest like it would with a simple interest loan.
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Liz Jenson
Answered on Dec 03, 2021

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