the next time you purchase a car. Although there are several important numbers to think about when it comes to choosing your lender, APR represents how much you’ll pay in interest and extra fees each year.

You can think of APR, or annual percentage rate, as the cost of borrowing money. It can help you tell the difference between a bad loan and a good one. In general, the APR you’re offered will depend on your credit score—the higher your credit score, the lower your APR will be—but negotiating for the lowest APR possible will save you money over the length of your loan.

Thinking about financing a new or used car? Running the numbers can get confusing! That’s why top-rated insurance app and comparison-shopping genius

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What is APR on a car loan?

A car loan’s APR, or annual percentage rate, combines the interest you’ll pay with the prepaid finance charges determined by your lender—plus any other costs you choose to include in your loan, such as sales tax or registration fees. Prepaid finance charges cover the upfront cost of writing your loan and usually include fees for:

Processing the loan application

Funding the loan

Underwriting

Other administrative services

The exact cost associated with prepaid finance charges depends on your lender.

MORE: What is APR and how is it calculated?

APR vs. interest rate

While APR and interest rate serve similar functions, it’s important to understand the difference between them.

Your interest rate is how much you pay to borrow money over the length of your loan

APR is your interest rate plus any additional fees and expenses associated with your loan

MORE: What is a good interest rate on a car?

Why is APR important?

Before you consider a loan offer, it’s a good idea to be aware of the costs you’ll pay to borrow money.

Because APR includes the full cost of securing a loan, it generally gives you a better idea of what you’re paying—and is the best gauge for telling the difference between a bad loan offer and a good one. Remember, though, that your monthly payment is based on your interest rate, not APR.

How understanding APR can help you save money on your car loan

When shopping for a car loan, it’s important to consider both the interest rate and the APR. But the APR gives you a better idea of what you’ll pay for your loan because prepaid finance charges (the additional fees included in the APR) can vary wildly from one lender to another. You might see very different APRs between lenders—even if the interest rate is the same.

In general, the lower the annual percentage rate, the less it will cost to finance your car.

Key Takeaway Compare APRs between lenders to determine the best loan offer.

How is APR determined?

Lenders use several factors to determine the APR on a loan, but credit score has the biggest impact. A score above 660 should result in a low APR on your loan. While you can still qualify for a car loan if your credit score is lower, you may have to pay a higher annual percentage rate.

Other factors that determine your final APR include:

Your down payment

The length of your loan

The age of the car

Your income

The prepaid finance charges

There’s no rule that requires lenders to offer the best annual percentage rate possible, so it’s always worth trying to negotiate for a lower APR. Even if you have bad credit, you might still be able to save money if you negotiate.

MORE: What is a good credit score for a car loan?

How do I know what the APR on my car loan is?

Thanks to the

Truth-in-Lending Act

, lenders are required by law to provide you with their loan offer’s annual percentage rate. Your lender will give you a document called a Truth-in-Lending disclosure which includes:

Your APR

An itemized list of prepaid financing charges and other fees

An explanation of how they affect the APR

Read this document carefully before you sign!

MORE: Does financing a car affect insurance rates?

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* checking your rate won’t affect your credit score

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* checking your rate won’t affect your credit score

What is a good APR for a car loan?

Around 4-5% is considered a good APR, but the best rate for you depends on your credit score. Negotiate with your lender to try and get the lowest rate.

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