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Auto Refinance

UPDATED JUN 24, 2022

Learn about the difference between APR and interest rate for auto loans

APR varies from interest rate because it takes into account the total yearly cost of credit.



5 min read

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Two of the most common terms used when discussing auto loans are APR and interest rate. Understanding the difference between these two terms is important if you're trying to make a smart decision when borrowing money for your car. By definition, APR stands for annual percentage rate, and interest rate is just that – a percent rate calculated from the loan's balance. APR and interest rate are often different when it comes to your auto loan. This is because they include different line items and factors in their calculations.

What is an auto loan interest rate?

To understand what an auto loan's interest rate is, we can take a look at the definition from our auto refinance term glossary.

  • Interest rate definition: The interest rate of a loan is calculated based on the principal balance and is the amount a lender charges for borrowing money. It is a percentage and is based on factors like loan term, borrower credit score, and lending risk. Valuation ratios like loan-to-value (LTV) and debt-to-income (DTI) can affect interest rates.

Digging into interest rate

As you can see, there are a number of different factors that go into determining your interest rate. These factors can also include your credit score, the age of your vehicle, and how much money you're borrowing. As a simple interest rate example, if you borrow $12,000 with a 2% interest rate, you may have to pay an extra $240 in interest a year. However, auto loan interest rates are often more complicated than this equation with interest being calculated monthly and decreasing with the loan’s balance. Keep in mind that different lenders can offer different interest rates. This is why it's important to compare rates from different lenders before you sign any loan paperwork.

According to a comparison of Spring 2021 rates during the Spring of 2021 by Edmunds, car buyers with a FICO score of around 700 in 2021 could have seen the average interest rate of 3.9% for a new car loan versus around 7.9% for a used car loan. We can compare these 2021 rates to Edmunds 2022 rates which show an increase of 4.7% for new vehicles and 8.0% for used vehicles. These changes occurred largely because of the interest rate hikes and are expected to continue to rise in the midterm. The higher interest rates indicate there is more perceived risk to lenders.

So before you go out and refinance your car, it's important to understand auto refinancing and shop around for the best interest rate possible using an auto loan marketplace like ours here at Caribou.

What is APR?

The definition of APR, or annual percentage rate, varies from interest rate in that it takes into account the total yearly cost of credit. We can also find this in the glossary.

  • APR: The annual percentage rate (APR) is the total yearly cost of borrowing money. APR is expressed as a percentage and includes the fees charged for the extension of credit. When comparing your APR to your interest rate, the lender's cost of credit, your APR will typically be a higher percentage rate. This is because the fees charged for the extension of credit are factored in.

Digging into APR

Using the definition, we can see that APR is the actual cost of your loan over the course of a year because it's the total cost of credit, expressed as a yearly rate. It includes the interest rate charged on a loan, plus any fees, points, or other charges associated with the loan. The APR is calculated according to a standard formula set by the Truth in Lending Act.

This standardization is important because it allows consumers to see the actual cost of credit and compare different loans and credit offers. The APR is also required to be disclosed in all credit agreements so you, as a consumer, know exactly what you're getting into. When you are refinancing your car, compare your new loan's APR versus your old loan before you sign any paperwork. This lets you compare the different offers and make sure you're getting the deal that you want.

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How is interest rate different from APR?

You’ll see both of these interest rate and APR terms when you refinance, but your APR more accurately shows what you'll pay at the end of the process. Since APR includes any other additional fees and costs along with the loan, you’ll want to use the APR percentage when you calculate the total cost instead of the interest rate.

The interest rate you qualify for is based on things like your credit score, debt-to-income (DTI), and loan-to-value (LTV). These factors may affect your ability to save money by lowering your APR while refinancing your auto loan. When you make improvements in these areas, you’ll often see your interest rate decrease.

This is one of a few reasons why you may want to refinance your auto loan. If your credit score, DTI, or LTV are better than they were when you took out your loan, you might be able to save money on interest. Depending on how big the change in interest is, you may be able to keep hundreds of dollars a year in savings and potentially thousands over the life of the loan.

When you refinance, you get to see a full breakdown of add-ons and fees when you refinance. Everything from the initial interest rate to the final APR is included, so you know what you’re paying and why.

APR and interest rate FAQs

  • What is an auto loan interest rate? An auto loan interest rate is the rate you are charged to borrow money from a lender.

  • What is APR? The annual percentage rate (APR) is the total yearly cost of borrowing money.

  • What is a credit score? Your credit score is a number between 300-850 that indicates how likely you are able to pay off your debts over time.

  • What is loan-to-value (LTV)? LTV is the ratio of the loan to the amount your vehicle is worth.

Auto refinance resources

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Read about glossary terms

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* This information is estimated based on consumers whose auto refinance loan funded through Caribou between 3/1/2023 and 3/1/2024, and had an existing auto loan on their credit report. These borrowers saved an average of $115.72 per month. Refinance savings may result from a lower interest rate, longer term, or both. There is no guarantee of savings. Your actual savings, if any, may vary based on interest rates, the repayment term, the amount financed, and other factors.

+ To check the refinance rates and terms you qualify for, we conduct a soft credit pull that will not affect your credit score. However, if you choose a loan product and continue your application, we or one of our lending partners will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

++ Social security number is required should you choose to move forward in the loan application process.

** APR is the Annual Percentage Rate. Your actual APR may be different. Your APR is based on multiple factors including your credit profile and the loan to value of the vehicle. APR ranges from 5.95% to 28.55% and is determined at the time of application. Lowest APR is available for a 60 month term, to borrowers with excellent credit. Conditions apply. Advertised rates and fees are valid as of 3/4/24 and are subject to change without notice.

Terms and Conditions apply. Caribou reserves the right to modify or discontinue products and benefits at any time without notice. Participating lenders, rates and terms are also subject to change at any time without notice. The information you provide to us is an inquiry to determine whether our lenders can make you a loan offer. If any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. We do not guarantee that you will receive any loan offers or that your loan application will be approved. If approved, your actual rate will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Offers not available in MD, MS, NE, NV, WV.

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