Car Buying Tips

What is APR for a Car Loan in Canada?

Purchasing a new vehicle can be a stressful experience. Many car shoppers already find it difficult to find a vehicle that suits their needs, while other factors like tricky sales tactics or confusing terminology may compound to make the experience even more nerve-wracking.

One somewhat confusing term that consumers may come across during their search for a new vehicle is “APR.” APR stands for Annual Percentage Rate and represents the total cost of acquiring the vehicle loan, including the interest rate over the duration of the loan. APR is calculated on how much of the loan is still outstanding, which is one of the reasons why it’s important to keep up on vehicle loan payments. The interest rate of a vehicle loan, by comparison, only represents how much interest a customer will pay on the vehicle loan amount.

It’s easy to confuse APR and interest rate, as both of these metrics are expressed as a percentage. But whereas a car loan interest rate is simply a percentage of the amount borrowed for the car loan, the APR accounts for the fees and additional costs of borrowing money. So while the interest rate for a car loan may be 2.99 per cent, for example, the APR may be slightly higher after associated lending fees are factored in.

The interest rate refers to the cost a car buyer will pay, on an annual basis, to borrow money. The APR, meanwhile, includes fees the lender may charge the car buyer on top of the regular interest rate. APR provides a convenient way for shoppers to compare monthly payments when shopping for a vehicle, as different financial institutions may have different rates and compounding periods, making a direct cost comparison tricky. Experts will caution buyers to pay closer attention to the APR than the interest rate when financing anything, whether it be a car or a house, as this represents the actual cost of the loan over its entire duration.

We suggest using an online car loan calculator when shopping for vehicles. A handful of Canadian banks have their own online auto loan calculators, allowing the user to input the purchase price of the vehicle they wish to buy, as well as the APR, trade-in value, and down payment to calculate what their monthly payments might be. This is a quick and easy way for Canadians to see they can afford a vehicle before they decide to contact the dealership or seller.