Auto Explained

APR vs Interest on a Car Loan (What’s the Real Cost?)

Interest rate and APR are not the same. One shows the rate — the other shows the cost.

Quick answer

  • Interest rate is the base rate charged on the loan.
  • APR includes interest plus certain fees.
  • APR is the better number for comparing loans.

What the interest rate means

The interest rate is the percentage the lender charges you to borrow money. It’s applied to the loan balance and determines how much interest accrues over time.

If your loan has a 6% interest rate, that’s the raw cost of borrowing — before fees.

What APR really shows

APR (Annual Percentage Rate) reflects the true yearly cost of the loan. It includes the interest rate plus certain lender-required fees.

  • Interest rate
  • Loan origination fees (if any)
  • Dealer or lender add-on fees tied to financing

APR puts everything into one number so loans can be compared fairly.

Why APR is usually higher than the interest rate

If a loan includes fees, APR will always be higher than the stated interest rate. The more fees involved, the bigger the gap.

Example:

Interest rate: 5.5%
Fees rolled into loan: Yes
APR: 6.2%

Which number should you focus on?

Use each number for what it’s best at:

  • Interest rate: how fast interest accrues
  • APR: total cost comparison between loans

Two loans with the same interest rate can have very different APRs.

How term length affects APR impact

Fees hurt more on shorter loans. When the same fees are spread over fewer years, APR jumps higher even if the interest rate stays the same.

  • Short term + fees = higher APR impact
  • Long term + fees = lower APR impact (but more interest overall)

Common dealer financing traps

  • Low interest rate advertised, fees buried in the loan
  • Focusing only on monthly payment
  • Extended terms that hide total interest cost

Always ask for the APR — and the total amount paid over the full term.

How auto loans work. →

Key takeaway

Interest rate tells you the rate. APR tells you the truth. When comparing car loans, APR is the number that matters most.