Terms like Annual Percentage Rate (APR) and interest are used a lot in the leasing or purchasing of new or used cars, but you could be forgiven for not completely understanding what they mean. In short, APR is used to compare interest (a monetary charge for borrowing money) across different loans, but often includes other charges as part of the overall figure.
APR is a crucial part of car financing as many car loans include interest, but the figure can can vary hugely depending on a few factors, including whether the car is used and its condition. On this page, we’ll explore how APR works, what it’s made up of and why it’s important to consider as a car financer.
What do I need to know about APR?
The higher the APR charge, the more you’ll repay when borrowing money. An overall APR charge applies to finance deals such as Personal Contract Purchase (PCP) and Hire Purchase schemes – as well as bank loans – and the lender must tell you what this figure is before you sign an agreement.
The APR figure shows the premium you’ll pay in exchange for the loan, including interest and any other charges that must be paid, such as the arrangement fee – the charge to set up the loan – or the option to purchase fee to make the car yours .
Many car manufacturers offer 0% APR, meaning that you will not pay any more than the upfront cash price should you wish to buy the car at the end of the finance contract. However, at the time of writing, interest charges are especially high and so many APR rates have also been driven up.
High APR could potentially cost buyers thousands over the original asking price. It’s more common on used car finance deals, meaning that buying new can sometimes be better value and even more affordable than buying used
What is the difference between interest and APR?
Interest is one of several fees that contribute towards an overall APR figure.
All other charges that must be paid by borrowers are also included in the APR quoted. Therefore, you’ll want to compare the APR figure rather than the interest rate when looking at different finance options, as the interest figure might doesn’t include any additional fees you might have to pay.
Don’t forget to take deposit contributions into account
APR is an important factor in establishing how good the value of a finance deal is. However, a large deposit contribution – which is effectively just one big discount – can more than outweigh any APR charged.
Keep an eye out for any deposit contributions – these can amount to in excess of £10,000 – as they can more than outweigh APR charges, turning what looks like a bad value finance deal into a great one.
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