APR (Annual Percentage Rate) financing is a common term in car dealer or car manufacturer advertisements. Although APR is a commonly used term in the industry, not all consumers know exactly what APR is. Like any sort of interest rate, the lower the rate, the more favorable it is for the consumer, but do you really know what you’re paying for when you get a low or high APR rate?
APR differs from a simple interest rate because a standard interest rate only contains the amount that must be paid to the lender in addition to the principal (the amount of the loan). Unfortunately, there are a hidden costs not represented by the interest rate that are included in the APR. These hidden costs can range from closing costs, to financing fees, to insurance requirements. The APR combines all of these extra costs with the interest rate into one simple rate.
It is essential for the consumer to understand what APR is because it is required by federal law so that consumers have a standard rate for comparison. Congress enacted this legislation through the Truth-in-Lending Act in order to aid the consumers and simplify the car buying experience.