What is an APR?

March 27th, 2018 by

Annual Percentage Rate or APR is calculated on the car loan. It could be found by using the rate per period and multiplying it as per the number of payments you would have scheduled for the year. Through the APR, you can determine the total cost of your finances for the year if calculated accurately. It is vital that when doing so, you take into consideration the compounding interest. This could be executed through the Annual Percentage.

When is the Best Time to Use Annual Percentage Yield?

You may have come across advertisements from car lenders that advertise rates through the APR. This would mean that the lender isn’t really revealing the price of compounding the interest. It is best that you calculate the annual percentage yield when opting for a new auto loan considering that it will help you understand the actual financing cost involved. Let’s look at an example to help you understand this better!

Let’s say that you have a vehicle loan of about $5,000 with a monthly interest rate of 2% which is to be paid over a period of 48 months. The APR for each year, calculated for 12 months would then amount to an APR of 2.4%. The APY or annual percentage yield, on the other hand, is calculated for a year and two months and further multiplied by 12 months minus 1. You could expect a 2.68% annual percentage yield on this.

What this means is that when the interest compounds, you will literally be paying a total of 2.68% toward the interest payments annually instead of just 2%. Not only will this lead to a drastic increase in your annual cost but also make you take a loan eventually. Therefore, you should always make it a point to consider the APY factor before taking any loan. This would help you determine if the offer proposed by the dealer is accurate. You will be surprised to find that small factors such as this can help you in the long run.

When Should You Use Annual Percentage Rate?

Let’s say that a company offers you a great scheme designed on the APY factor along with the compounding interest effect. While this may not be a problem, make sure to avoid a comparison between this loan and another that would offer you terms on the basis of APR. In doing the same, you would be comparing oranges to apples. What you can do instead is bring together the two with the same measurements to be able to determine the best. It is advisable that you bring them together and look at it from the perspective of APR.

In all, make sure to understand what you’re getting into. Take time to ask questions or surf the web. Do not make an investment without understanding possible future outcomes. APR could get a little confusing sometimes. If you think you need help in this domain, make sure to get in touch with a professional. Contact a reliable dealership and they can also help in making the right selection.

 

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