No matching results

Recent Articles

Popular Makes

Body Types

What is Low APR?

by Autobytel Staff
May 20, 2011

In the world of finance, debt has a price. Any loan, from the smallest credit card transaction to a million dollar business deal has a cost, and that same concept applies to financing an automobile. Unless you can pay cash for the vehicle you want, you will be forced to incur a debt to meet the seller’s price. The lender will grant that loan to you for a price, at some rate of interest, and that interest will be figured for the year, or annually, which where we derive the term, annual percentage rate, or in more common circles, APR.

What is Low APR?

Of course, the best APR is the lowest, and nothing is lower than zero, and while many cars fall under the zero interest program, few borrowers qualify for the zero rate, but they will qualify for a low rate, and in paying a debt, the lowest possible interest rate is the goal for the simple reason that it means saving money.

Let’s say we finance $20,000 at 5 percent for a five-year loan. That means we agree to pay the lender $5 for every $100 we borrow over the span of one year. Since we’re borrowing $20,000 for five years, we’ll be paying $1000 in interest for every year. Over five years, we’ll pay $5000 in interest plus the $20,000 of principle debt for a total of $25,000. Drop the rate to 4 percent for the same loan over the same amount of time, we see that we’ll pay $4000 in interest and save $1000 over the life if the loan. Drop the rate even lower, and the results speak for themselves.

In automobile financing, a low APR is used to attract buyers. Like the zero percent financing pitch, the low APR pledge also requires the buyer to qualify, and qualifying means having steady income, a solid credit history, and a higher FICO score.

Borrowers qualifying for a low APR will be granted the discount because they have demonstrated less risk to the lender. Risk comes into play with every loan and is reflected in the FICO score. Established by the Fair Isaac Corporation in 1956, the number generated by a host of credit data plugged into the Fair Isaac computers reflects a person’s likelihood of risk. A higher number means the person will likely present a lower risk. A lower FICO score indicates a higher risk.

If we look at an automobile loan objectively, we see a buyer asking a third party to lend him money for a car he cannot afford to buy outright. The lender faces the risk that the borrower will be unable to pay for the car and thereby leave the lender without the money and without the car he has used as collateral for the debt. The lender weighs that risk and formulates the interest rates accordingly.

A borrower demonstrates his ability to pay by showing a history of steady income, by showing a history of paying his debts, from credit cards to the garbage bill, and demonstrating a responsibility with money.

A responsible borrower will be granted a low APR because the lender believes his faces less risk. Younger people or people just beginning a credit history face a higher APR since they lack a track record of responsible financial dealings. The lender faces more risk and thusly requires a higher price, or interest rate, to make the loan.

A low APR comes with time and history. Buyers can attempt to negotiate a low APR, but numbers tell the truth, and a lender can go only so far. He will above all protect himself in any deal, and the deal for a low APR will happen only if the lender knows he will make money. 


Interested in Getting a New Car?

Used Cars Near You

No Data Available

Powered by Usedcars.com
©2024 AutoWeb, Inc. All Rights Reserved.
Some content provided by and under copyright by Autodata, Inc. dba Chrome Data. © 1986-2024.