The short answer
The interest rate decides how much interest is added to your balance each month. The APR (annual percentage rate) starts from the same rate and adds the lender’s required fees, then expresses the total cost as one yearly rate. If a loan has no fees, the two are equal. If it has fees, the APR is higher, and the APR is the number to compare between lenders.
A worked example
Say you borrow $25,000 for 60 months at a 7.00% interest rate.
- Monthly payment: $495.03
- Total interest over five years: $4,701.80
Now suppose the lender charges a $500 origination fee and takes it out of the money you receive. Your payment is still $495.03, because it is based on the full $25,000. But you only got $24,500 to spend. Paying $495.03 a month for 60 months on $24,500 works out to an APR of 7.85%. Same loan, same payment, almost a full point higher once the fee is counted.
If the fee is added to the loan instead, you borrow $25,500, your payment rises to $504.93, and the APR on the $25,000 you actually needed is 7.83%. Either way, the fee shows up in the APR.
Why the APR can differ between countries
Countries do not all calculate APR the same way.
- United States and Canada: the APR is a nominal rate, the monthly rate times 12. A 7% loan has a 7% APR if there are no fees.
- United Kingdom and the EU: the APR (called the APRC, TAEG in France or effektiver Jahreszins in Germany) is an effective rate that compounds the monthly rate. The same 7% nominal loan shows an APR of about 7.23%.
- Mexico and Brazil: lenders must show an all-in effective cost (the CAT in Mexico, the CET in Brazil) that includes fees, insurance and, in Brazil, the IOF tax.
That is why the same offer can look a little different depending on where it was quoted. Compare APRs calculated the same way, ideally from the same country.
What counts toward the APR
Rules vary, but the APR usually includes interest, origination or arrangement fees, and any insurance the lender requires. It usually leaves out government charges such as title, registration and taxes, and optional products you choose to buy. If a dealer adds an extended warranty or GAP coverage to the loan, those raise your amount financed and your payment even though they may not show up in the APR, so read the itemized amount financed too.
How to use this when you shop
- Ask every lender for the APR on the same amount and term.
- If you only know the monthly payment, enter it in the car APR calculator with the price, down payment, term and any fees to find the real APR.
- Compare total cost too. A lower APR on a longer term can still cost more in total interest.
Try it yourself
Open the car APR calculator and enter your own loan. It works in 13 currencies and follows each country’s loan rules.