If you're planning to purchase a new Honda, unless you'll pay cash upfront, you'll likely be taking out a car loan. This loan is paid back with interest over a predetermined number of months, and interest is the fee the lender charges to issue the loan. However, the interest rate doesn't tell the full story regarding a loan's actual cost. For that, you'll need to know the APR, or "annual percentage rate."

What's the difference between APR and interest rate?

While a car loan's interest rate is the amount charged by the lender to issue the loan, the APR indicates the interest amount for a whole year, written as a percentage, and includes all fees, such as the origination fee (the payment associated with establishing the loan account) and prepaid finance charges. This distinction makes APR a more accurate reflection of the cost of financing a vehicle.

How is APR calculated?

The quickest and most accurate way to find your APR is to simply ask the lender. In the United States, the Truth in Lending Act declares lenders must provide all loan details, including the APR, before the borrower signs a loan agreement. Therefore, the APR will be clearly noted in the contract and pointed out by the finance representative. However, it's possible to estimate the APR yourself if you know the loan amount, the term length, the interest rate, and any other fees associated with the loan.

First, you need to find the total monthly payment, including the standard interest rate. If you don't know it, you can calculate it yourself. But since the total loan amount changes with every payment you make, it's easiest to use a spreadsheet program like Microsoft Excel or Google Sheets. Simply type the following into any spreadsheet cell:

  • =PMT(interest rate as a decimal/12, number of months in loan term, loan amount with fees)

For example, imagine you want to finance $20,500 ($20,000 for the loan plus a loan application fee of $500), the term length is 60 months, and the interest rate is 3.5%. Then, you would enter the following into any spreadsheet cell:

  • =PMT(.035/12,60,20500)

In this example, the total monthly payment would be $372.93, expressed as a negative number (or in red). This is important, as the formula for APR will use -$372.93. Now, you can use the following formula to calculate your APR:

  • =RATE(number of months in loan term, estimated monthly payment, value of loan minus fees)*12

Using our example above, you would enter:

  • =RATE(60,-372.93,20000)*12

The APR is 0.045, or 4.5%. You can now compare this rate side-by-side with other lenders, which can help you pay less to finance a vehicle.

Get convenient Honda financing near Brockton, Dedham, Everett, and Hyde Park

Reach out to Prime Honda – Boston today to learn more about financing a new Honda and the latest special offers. And if you'd like to try out a new Honda for yourself, we welcome you to visit us here in West Roxbury for a test drive. We'll be happy to assist you.

Categories: Finance, New Inventory