What is APR and why does it matter?

The APR rate is a standard interest rate to allow you to compare across types of finance, it includes all the costs of lending, for example, interest and fees. It also takes into account that you are paying down the loan principal over the term of the loan

When it comes to car finance loans it is important to make sure that you have compared like-for-like deals, looking at the overall cost rather than just the specified monthly rate.

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It is usually found that the longer the loan, the lower the rate. However, this often means you will pay extra in the long run.

This can be seen in the following example: a car buyer decides to takes a two year car finance package with an APR of 5% which costs them £300 a month, instead of a deal with an APR of 4% APR at £250 a month over 3 years. The 4% deal may sound better at first, but over the course of the loan you would end up paying significantly more.

The advertised APR may also not be the actual rate you end up with after finalising the deal, so always make sure that you know exactly what you will be signing up to before making any definite agreements.

This is because many finance packages contain additional fees that often go overlooked, and can seriously increase the overall cost of your car finance deal.

The amount of APR is based on a number of factors including the amount you borrow, the length of time it is borrowed for and how often installments are made and how much they cost, as well as any additional charges that are added into the total loan repayment.

If an APR isn't clearly outlined then make sure that you ask for it to be confirmed.

Beat the jargon of car finance and gain an understanding into how it all works by reading the MotorPocket finance glossary.

For more information on applying for car finance visit the Finance Tips section on the MotorPocket blog.