What Does APR Mean?
What Does APR Mean And How Can You Work Out How Much You'll Pay From A Certain Level Of APR?
Nov 21, 2014
Over recent years, more and more drivers are using finance to buy a new car. Recent figures from the Finance and Leasing Association (FLA) revealed that more than seven in ten new-car buyers fund the purchase of their vehicle using finance from a FLA member.
There are lots of great finance deals on offer which can help you to afford the cost of a new car. One of the ways to compare the relative cost of finance between banks, lenders and your car dealer is to consider the APR figure. But what is APR? How does it work? And will you get a better deal from your car dealer than from your bank? Keep reading for the answers to these questions and more.
What is APR?
APR stands for the Annual Percentage Rate and it is a figure that is designed to help you to compare the cost of borrowing. The APR figure does not just include the interest rate that you will be charged but it will also include any associated fees and charges.
The APR is supposed to give you the overall annual percentage charge for a debt such as a personal loan or car finance.
The official definition of APR from the Financial Conduct Authority (FCA) says:
"APR stands for the Annual Percentage Rate of charge. You can use it to compare different credit and loan offers. The APR takes into account not just the interest on the loan but also other charges you have to pay, for example, any arrangement fee. All lenders have to tell you what their APR is before you sign an agreement. It will vary from lender to lender."
An APR example
The APR takes into account the interest rate on the debt and associated fees and charges. Here’s an example from the AA:
If you borrow £3,000 over 3 years at a Representative APR of 7.8% you would pay:
- Monthly payment: £93.73
- Total charge for credit: £374.73
- Total amount you repay: £3,374.60
The APR you’ll pay on leading models
If you’re buying a new car using finance then it pays to check the APR. Many manufacturers will offer a low rate of APR as special offer to encourage you to buy the model.
Some manufacturers even offer 0% finance through dealers. This means that you can drive away a brand new car without paying any interest on the borrowing.
For example, in November 2014 it is possible to buy a brand new Mazda 2 Hatchback 1.3 SE 5dr with 0% finance.
The cash price is £11,195 and on top of the customer deposit of £3,900, some dealers will provide a dealer deposit contribution of £500. The amount you would therefore need to borrow to buy the car is £6,795 and there is a ‘guaranteed future market value’ of £3,434. Assuming you drove no more than 8,000 miles a year you’d benefit from paying 0% interest on the finance, making the monthly repayments just £80.02.
Some new Skoda models are also available with 0% finance while there are also low cost finance deals on new Ford models (typically 4.2% APR) and Kia models (typically 4.9%). Nissan also have some excellent finance deals with rates starting at around 6.9% APR.
Car finance can boast a lower APR than borrowing from other sources
Taking a low cost finance deal from a dealer can save you hundreds of pounds in interest when compared to a loan from your bank or building society.
For example, if you bought a car for £10,000 with 0% APR finance over four years your monthly repayments would be £208.33 per month.
Compare this to the cost of a bank loan from TSB. If you used a TSB loan to borrow £10,000 over four years you’d pay a monthly sum of £238.24 and a total amount of £11,435,52 (at 6.9% APR).
Overall, you’d pay £1,435.52 more using a bank loan than dealer 0% finance.
As well as saving money there are also other reasons why you would consider getting your car finance through a dealer. These include:
- The convenience of a ‘package’ deal which may include other benefits such as servicing or road tax.
- The ease of not having to shop around.