Interest is the cost of borrowing. When a financial institution agrees to lend you money, they will do so only when they will gain something too: in exchange for loaning you money, you will have to repay it with a little extra 'interest'. The 'interest rate' indicates how large the interest charge will be and ultimately, how much your loan will cost. The interest rate is stated in terms of a percentage of the amount borrowed, which is usually the total percentage you must pay each year. If the interest rate is five percent on a one thousand dollar loan, you are charged fifty dollars interest over the year.
The Annual Percentage Rate (APR) is the standard measurement of an interest rate. Essentially, the APR accurately indicates how much your loan will cost you, as it includes all the compulsory charges you will pay. The 'typical APR' advertised by lenders, allows you to compare a range of loan deals more easily. However, bear in mind that the typical APR is the interest rate that applies to two thirds of a lender's car loan customers, which means that the rate offered to you may differ. When you apply for a car loan, the lender will run a credit check to see how reliably you have repaid your debts in the past. If you have a good credit history, you should be offered the typical APR; if you have a poor credit history, or the lender regards you as 'high risk', perhaps because you are self-employed and have no reliable income, you may be offered a higher interest rate.
The lower the APR, the lower the interest charge, and thus the lower the cost of the loan. The longer you take to repay a loan will also affect the overall cost however, as the APR is the interest charged every year; the shorter the repayment period, the cheaper the loan will be. Many car loans have a fixed interest rate, which means that you can calculate the total cost of the loan more accurately, because the interest charged is always a fixed percentage of the amount borrowed. The disadvantage of a fixed rate is that, if the general interest rate falls, your interest rate may be higher than the general rate and your loan will cost you more in the long run. If you are offered a flexible (variable) interest rate, you should consider whether you would be able to afford the repayments if the interest rate rose. Advisers usually suggest accepting a fixed interest rate; this facilitates better financial planning as you are always aware what the next month's repayment will be.
You should find that interest rates are lower if you take out a secured car loan, because the lender knows that in the event that you cannot repay your debt, they can take possession of the item of security (usually your car). Unsecured car loans usually have higher interest rates, but this may not always be the case because typical APRs vary considerably between lenders. Similarly, bad credit car loans usually have very large interest rates, as the lender considers you 'high risk'; the likelihood that you will make all your repayments on time is lower than someone with a good credit history. If you find the interest rate on your existing car loan is very high, you may consider taking out a refinance car loan, which will pay off your existing car loan and enable you to reduce your monthly repayments by offering you a loan at a lower interest rate.
