How is APR applied to car loans?

How is the APR applied when I make payments on my car loan? I don’t really understand how it works. Someone told me that I can’t lower the interest I need to pay on my loan by making bigger payments, but that doesn’t sound right.

It’s entirely possible to reduce the amount of interest you pay on a car loan, but it will depend on what type of loan you have!
The APR, or Annual Percentage Rate on your car loan is simply the amount of interest that your lender will charge you each year, plus any other fees associated with the loan. There are two ways that the APR is applied to your loan:
  • Simple interest. When you first start paying off a loan with simple interest, a majority of your payments will go towards the APR. As you continue to make payments, larger amounts will go towards the principal of your loan or the amount you borrowed before interest. If you pay more than your monthly payment, you can reduce your principal and the amount of interest you owe.
  • Precomputed interest. Your APR is divided evenly across all of the loan payments you’ll make. 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 like it would with a simple interest loan.
While it’s hard to find the right car loan, you can easily find a customized insurance policy with the Jerry app. Download Jerry and answer questions to see your policy options in a comprehensive list. Jerry can even help you cancel your old policy and sign up if you find a quote you like.
Liz Jenson
Answered on Dec 03, 2021

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