The short answer to this question is: Yes! But you need to know a bit more.
If you’re considering financing a new or used Ford, you’ll likely come across these two important terms: interest rate and APR (Annual Percentage Rate). While they sound similar, they aren’t quite the same, and knowing the difference can help you make smarter financial decisions when purchasing your next vehicle.
At Mike White Ford in Coeur d’Alene and Sandpoint, Idaho, we want our customers to feel confident and informed when it comes to every aspect of their car-purchasing experience, including in the area of financing. Let’s break down these terms and explain what they mean for your vehicle loan.
What Is an Interest Rate?
Put simply, an interest rate is the cost of borrowing money. In other words, when a lender loans you money, it makes money by charging you a fee to use their money, and it is commonly expressed as a percentage of the loan amount. For example, if you borrow $20,000 (called the principal of the loan), the lender may tell you that the interest rate is 6.00%. That means you’ll pay the lender 6.00% on the balance that you owe for each year you have an outstanding balance.
As you pay down the loan, part of your payment is the interest, and part of the payment is the principal; as your principal is paid down, your interest rate stays the same. For car loans, lenders calculate the total cost of the loan as you pay it down so that your payments will be the same every month. So, for example, in this case, a $20,000 loan at 6.00% for a term of 5 years (60 months) means that your payment will be about $387 per month.
What Is APR?
The APR (Annual Percentage Rate) is the lender’s interest rate with additional fees and costs associated with the loan. These fees and costs can include loan origination fees (that lenders sometimes charge), documentation fees (such as vehicle registration and licensing), and any other charges directly associated with the loan. Lenders provide an APR to give shoppers a more complete picture of what your loan will truly cost over time. Because APR accounts for these extra costs, it’s usually slightly higher than the interest rate.
Why the Difference Matters
Understanding the difference between APR and interest rate is important when evaluating financing offers. For example:
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A loan with a lower interest rate but higher fees might end up costing more once the APR is factored in.
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A loan with a slightly higher interest rate but lower fees may actually be cheaper overall if it has a lower APR.
In other words, when comparing loans, make sure you are looking at the same thing and not comparing an interest rate with an APR. In general, using the APR rather than interest rates ensures you’re comparing apples to apples and gives you a better understanding of the true cost of a loan (as well as what you can expect to pay every month) when shopping for financing.
What Do Lenders Look At in Offering Financing?
The cost of the money you borrow matters a great deal when shopping for a car. For example, in the scenario above for a $20,000 loan, a 7.00% rate would raise your monthly payment to almost $396 per month; that means you will pay an additional $540 over the life of the loan.
The rate you pay will depend both on current lending rates as well as your personal credit history. Before shopping for a car, evaluate some of the factors that influence the rate you will pay, including:
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Loan term length (typically, anywhere from 4 to 7 years)
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The amount of your down payment
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The type of vehicle you’re financing (new or used)
Improving your credit score, making a larger down payment, or choosing a shorter loan term can all help you qualify for a better rate.
How Mike White Ford Can Help
At Mike White Ford, our finance team is able to work with multiple lenders, including Ford Motor Credit, to help you find competitive financing options. We’ll walk you through both interest rate and APR so you fully understand what you’re agreeing to. If you already have pre-approval from your bank or credit union, we can help you compare that offer with what’s available through our dealership network. Our goal is simple: to make sure you drive home in the Ford you love with financing that makes sense for your budget.
When you’re ready to finance your next Ford, you can trust Mike White Ford in North Idaho to guide you through the process and help you find the best option. Contact us today to learn more about what vehicles we have in stock, whether we have any special financing offers, or even to start your loan application online.