Everyone wants to find as cheap of an auto loan as possible. And more than likely, you've been told that the cheapest auto loans are the ones with the lowest auto loan rates. Luckily, that advice is true. The lower your auto loan rate, the less money you will owe. However, it gets a little tricky after that point because there is more than one type of auto loan rate.
When you start looking for auto loans, you will find that all auto loans have two different types of auto loan rates: interest rates and annual percentage rates (APR). On each auto loans, those auto loan rates will be different. For example, a $20,000 auto loan may have an interest rate of 7% and an APR of 9%.
Why Are the Two Auto Loan Rates Different? When you look at the interest rate, you are looking at how much your lender is charging you to borrow the money. The interest rate is used to calculate how much interest you must pay. If interest was all that you had to pay when you take out an auto loan, then it would be easy to find the cheapest loan. All you would have to do is look for the auto loan with the lowest interest rate. However, interest is not all you have to pay.
In addition to being charged to borrow money, you will also have to pay additional fees. Those additional fees will vary lender to lender. I know what you are thinking, so what? All I need to do is find the lender that offers the lowest interest rate and lowest fees, right? Unfortunately, it's not that easy.
You see, lenders want to trick you into thinking they have the best deal. So some lenders will say they aren't charging you any loan fees, but charge you an inflated interest rate; whereas, other lenders will charge a really low interest rate, but have very expensive fees (Morris 44). As a result, it makes it very hard to determine which lender has the best offer. After all, could you decide whether a $20,000 auto loan with no fees and an 8% interest rate is better than an auto loan for the same amount with $2,500 fees and a 7% interest rate. Yea, it gets pretty confusing.
To help you out, the government decided that there needed to be an easy way for consumers to compare loans. So, in the Truth-in-Lending statement, the government specified that lenders must disclose the APR auto loan rates, which is a simple way of showing you how much the loan will actually cost per year (Morris 44). Typically, the APR is higher than the interest rate because it includes both the interest rate and upfront fees charged by the lender (Guttentag 19). It sounds really great, doesn't it? You only have to look at one thing to tell if the loan you are getting is the cheapest one available.
Well, it's almost that great. Unfortunately, there is one small problem. Not all fees are included in the APR auto loan rates. Any fees that must be paid to a third-party won't be calculated in the APR (Guttentag 19). So the best thing to do when comparing loans is to ask your lender what fees are missing from the APR auto loan rates. Knowing what fees are missing will enable you to compare the APR auto loan rates accurately.
The bottom line is that when you compare auto loan rates, the rate you should be looking at is the APR, not the interest rate (Faerber 136). That's because some lenders may try to fool you by offering very low interest rates, but charging ridiculously high fees. When comparing APR auto loan rates, make sure you ask to see what fees weren't included. Once you've taken account for the fees that are missing, choose the auto loan with the lowest APR because it is the cheapest.
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