Discover The Importance Of Annual Percentage Rate (APR) In Loans 2022

Introduction

In India, APR is definied by annual percentage rate with any fees levied by the financier on your loan. Fees such as processing fee, administrative fees, etc. Car loans, or any type of loans have hidden fee and charges that the lenders may charge to process your loan. However, these fee may vary from bank to bank and lender to lender depending on their policies. The fee may be low to zero, in few cases, even high, depending on several factors of the loan.

An interest rate is the percentage of the loan amount paid monthly with an additional principal amount. This percentage does not include any fees charged for the loan unlike the annual percentage rate (APR) which includes fees as a percentage.

Annual Percentage Rate (APR) = [(I/P/T) x 365] x 100
Where I = Interest, taxes, and fees, P = Principal amount, T = Tenure/Term (in days)

What Is Annual Percentage Rate?

A loan’s APR or Annual Percentage Rate, determines how much it costs to loan money to purchase a car. It includes interest and fees, represented as a percentage. The lower the APR, the easier and cheaper to borrow a loan. An APR depends on several factors including credit score and desired vehicle. If you have an excellent CIBIL score of 750 or higher, the average car loan percentage will be approximately 5% for a new car and 5.32% for a used car.

These percentages may vary depending on your credit score, the lower the credit score, the higher the APR. However, an APR below 10% is good. That being said, your income, payment history, and credit score will play a bigger role in the percentage. And you might want to consider all options if you are going to a lender with a bad credit score. And if you do not have a cosigner, then you might want to consider having one if you want to reduce the APR.

How to Calculate Annual Percentage Rate (APR)?

As we have mentioned above, APR = [(I/P/T) x 365] x 100

This depends on the principal amount, interest rates, and tenure. Calculating this beforehand helps you determine your budget and finance without having to break the bank.

Before diving into the subject part, know that there are several tools available online to determine the Annual Percentage Rate on your loan. And to calculate the loan, you will need the following information:

Loan Tenure: This is the length of the auto loan in months or years, converted into days. I.e 4 years or 48 months is 1,461 in days.

Principal: This is the loan amount borrowed. I.e principal amount = price of the car – down payment (if any) – trade-in value (if any).

Interest Rate: Interest is the added cost on the principal amount that you will have to pay monthly as EMIs. Include taxes and fees in the interest rate to calculate the APR. Fees such as rebates, organizational fees, or any dealer fees are added to this along with any other taxes applicable.

Factors affecting Annual Percentage Rate

You have calculated the APR and you have an APR above 10%. And if you want to know why there is a higher Annual Percentage Rate (APR) on your loan while your friend who has borrowed a loan on the same car at the time with the same principal amount has 5%. So how is APR affected? Below are some key components you might want to consider:

Credit History: As mentioned above, the higher the credit score, the lower the APR you can benefit from. You can even take advantage of 0% APR from new car dealers offering promotional deals if you have an excellent CIBIL record.

Tenure And Interest Rates: We all know that the longer the tenure, the higher the interest rates and the more the EMIs. This is why usually people who buy a new car will consider a term of 3 years as ideal, even if all the banks offer tenure of 1 -7 years and 3 more years in case of emergencies or special circumstances.

Employment Stability and Financial Situation: The term of employment and stable income are very important factors that lenders will consider to feel confident about your repayment capabilities. Therefore they will consider the income and debt-to-income ratio when calculating the Annual Percentage Rate.

Down Payment: Now the down payment is something that will not only determine the interest rates but also the APR. The higher the down payment, the less the tenure, and the less the interest rates and APR. And if you have a vehicle to trade in, it will be more convenient to fund a down payment without having to draw any additional amount from the personal account. Estimate your trade-in value and manage your down payment percentage on the vehicle.

Vehicle Condition: For used car buyers, lenders may calculate APR against mileage, and wear and tear of the car. This is where new car owners benefit from getting lower percentages on loans.

Note: If you have a variable payment method, your interest rates may vary along with your APR depending on the federal or market rate increase. Moreover, if you are paying your debts in full by the end of the month, you won’t need to worry about the APR, but if you are not making timely payments by the due date, your APR is going to hike significantly.

How To Avoid APR Fees?

There are several ways you can avoid the weightage of annual percentage rate too. And if you are someone who wants to benefit from this, then this section is for you.

As we have mentioned earlier, paying debts every month in full will ensure your APR is taken care of. This means that you should reduce your spending and not exceed your budget to maintain a healthy repayment history. Along with this, you can also look for a credit card with 0% APR. Check-in with the card issuer or the lender on their requirements beforehand.

Overall if you want to reduce the Annual Percentage Rate down to 0%, you will need to reduce your interest rates, increase your credit score, consider deferred interest financing, and even opt-out options that you will benefit from with a lowered interest rate.

APR Vs APY

The Bottom Line

Whether you pay on time or late, your APR is going to be higher than your interest rates, and therefore it is very important to track your APR and talk with your lender about the additional fees they are charging you. You would not want to waste money somewhere else while you can save them up for another purchase.

However, APR is negotiable just like the price of the car is. And if you have a higher APR, you might want to check your credit score and negotiate with your lender if you feel that the APR is not reasonable under the given circumstances.

If you are still unsure how, give us a call at Blue Carz and schedule a free consultation with our representative, who will take you through the entire process of availing of a loan. Get discounts on your loan with our leading partners, HDFC, SBI, Kotak, Axis, ICICI, and more! Grab your benefits today.