What Is APR Financing? What the Rate on a Car Loan Covers
What is APR financing? APR stands for annual percentage rate, and Ontario's vehicle sales regulator, OMVIC, describes it as the total yearly cost of borrowing money to finance a vehicle, expressed as a percentage.
It takes in the interest and certain other borrowing costs, so it shows the cost of a car loan more completely than the interest rate alone.
Picture a first-time buyer in Carleton Place holding two finance offers, one from a bank branch in Kanata and one from a dealer, and wondering which one costs less. Here is what the APR covers, what it leaves out and how to compare the two.
Key Takeaways
APR stands for annual percentage rate: the yearly cost of borrowing, shown as a rate, taking in the interest and certain other borrowing costs.
When interest is the sole cost of borrowing, the APR and the interest rate match; when other required charges apply, the two part ways.
The APR does not capture everything: charges for optional services, default charges and prepayment charges are disclosed separately, not folded into the APR.
In Ontario, the APR has to be in writing before you sign, along with the term and the total cost of borrowing.
The same APR can cost more on a bigger or longer loan, so compare the total cost of borrowing as well.
There is no single good APR for everyone; what you can judge is whether one offer beats another on the same amount and term.
What Is APR Financing on a Car Loan?
On a car loan, the APR is the total yearly cost of borrowing the money, expressed as a percentage. It reflects more than the interest, because certain other costs of borrowing are counted in it too.
That is why the APR shows the cost of a loan more fully than the interest rate does.
The vehicle sales regulator puts it this way: unlike the interest rate, the APR includes the interest rate plus certain borrowing costs and fees, giving you a better picture of the total cost of financing.
The APR meaning on a car loan is the same as on any loan: the yearly cost of borrowing, shown as a rate.
APR Meaning on a Car Loan: How It Differs From the Interest Rate
The interest rate is the price of the money itself. The APR starts from the interest, adds certain other costs of borrowing that come with the agreement, and expresses the total as a yearly rate.
When there is no cost of borrowing other than interest, Ontario's rules make the APR and the interest rate the same number.
When there are other required borrowing charges, the two numbers part ways, and the APR is the one that shows them.
So when two offers show the same interest rate but different APRs, ask what other borrowing costs sit inside the higher one.
Comparing interest rates alone can miss those costs; comparing APRs brings them into view.
What Counts as the Cost of Borrowing?
In Ontario, the cost of borrowing means what you are required to pay to have the loan, beyond paying back the amount you borrowed. The interest is part of it, and so are other required borrowing charges that come with the agreement.
The APR takes that cost and expresses it as a yearly rate, so it reflects the charges the interest rate alone leaves out.
The Financial Consumer Agency of Canada says the total cost of a loan includes the amount of the loan, the interest on the loan and any other applicable fees. Its advice is to make sure you understand that total before making a decision.
On any offer, ask which charges are in the APR and which are listed separately.
What Does the APR Leave Out?
The APR does not capture everything. Ontario's rules leave some charges out of the cost of borrowing, including charges for optional services you choose to accept, default charges if a payment is missed, and prepayment charges or penalties.
An optional service is one you do not have to accept to get the loan. Those items are disclosed separately, not folded into the APR.
That means the APR does not tell the whole story by itself. Read the separate lines as well.
Look for optional services listed separately and decide on each one on its own merits.
If you are weighing an early payoff or a refinance later on, Carleton Place Ford's guide to refinancing a car loan covers when it can make sense.
Where Does the APR Appear in Writing in Ontario?
In Ontario, the APR is not something you have to work out for yourself. When you finance a vehicle, the paperwork has to show it in writing before you sign, alongside the term, the total cost of borrowing, each borrowing charge other than interest, and the total of all your payments.
The vehicle sales regulator says the financing agreement and bill of sale should set out the financing terms, including the APR, so you understand the total cost of borrowing before you sign.
It adds that verbal assurances do not replace written disclosure.
The federal consumer agency says the disclosure statement explains the total cost of borrowing and other important information, and it comes before you finalize the agreement. Make sure to ask for a copy.
What else an Ontario dealer's paperwork has to show is covered in Carleton Place Ford's guide to in-house financing at car dealerships.
In Ontario, a finance ad that shows a rate or a payment also has to show the APR and the term, and the APR has to be as prominent as the rate or payment it sits beside.
Why Can the Same APR Cost Different Amounts?
Because the APR is a yearly rate, it cannot tell you the total on its own. Two loans at the same APR can cost very different amounts if one is bigger or runs longer.
The federal consumer agency notes that a longer term brings the payment down but means more interest overall.
The vehicle sales regulator says longer repayment periods may increase the total paid over time.
That is why the total cost of borrowing on the paperwork matters as much as the rate.
So look at both: the APR for the yearly cost, and the total cost of borrowing and the total of all your payments for the full picture.
If you are trading in a vehicle you still owe money on, compare what you owe with what it is worth.
If you owe more than the vehicle is worth, the shortfall may be added to the amount financed, increasing the amount borrowed and potentially the total cost of borrowing. Financing is subject to lender approval (O.A.C.).
Before you compare the two offers, you can value your trade.
Fixed or Variable: What the APR Tells You
A fixed rate stays the same for the whole term; a variable rate can go up or down during it, as the federal consumer agency describes them.
On a variable offer, the APR is worked out on conditions at the time it is calculated, so it describes the loan on day one, not a promise for the whole term.
If the rate on an offer can change, Ontario's rules require the paperwork to say so, give the starting rate and explain how the rate will be set.
When you compare a fixed offer with a variable one, you are comparing a known cost with one that can move.
Ask which kind each offer is before you compare the APRs side by side.
How to Compare Two Finance Offers
There is no single good APR for everyone, because the rate a lender offers depends on your credit history, the lender and the vehicle. What you can judge is whether one offer beats another.
Put two offers side by side on the same amount and the same term, then compare the APR and the total cost of borrowing, not only the payment.
1. Line up the same amount financed and the same term, so the two offers describe the same loan.
2. Compare the APRs, not the interest rates alone.
3. Compare the total cost of borrowing and the total of all your payments, not only the payment.
4. Check whether each rate is fixed or can change during the term.
5. Look for optional services listed separately, and decide on each one on its own.
6. Get it in writing before you sign, and check that the contract matches what you were offered.
If one of the two offers is a no-interest one, Carleton Place Ford's guide to no-interest offers in Ontario covers what to check.
The federal consumer agency suggests getting quotes from more than one dealer and lender, and the vehicle sales regulator suggests asking your own financial institution what it can offer so you can compare.
The vehicle sales regulator's wider advice is to look at the big picture: the monthly payments, the selling price of the car and the cost of borrowing.
It also advises making sure the stated terms and rate on the contract match what was promised.
For a buyer rebuilding credit, Carleton Place Ford's guide to bad credit car loans in Ontario explains what an application involves.
Applying for Financing at Carleton Place Ford
Apply for financing on approved credit (O.A.C.) before you come in if you wish. With your consent, we can review options with participating lenders.
Approval, rate, term and payment depend on the applicant, lender and vehicle, and a credit-bureau inquiry may be required. Bring a driver's licence and proof of income if requested; lender requirements vary.
At Carleton Place Ford, we work with both prime and non-prime lenders, on approved credit (O.A.C.).
We put our appraisal of your trade in writing. You can value your trade before you come in.
Frequently Asked Questions
What Is a Good APR for a Car?
There is no single good APR for everyone, because the rate depends on your credit history, the lender and the vehicle. Compare two offers on the same amount and term, and look at the APR and the total cost of borrowing, not only the payment.
Financing is on approved credit (O.A.C.).
Is the APR the Same as the Interest Rate?
It can be. When there is no cost of borrowing other than interest, the two are the same number under Ontario's rules; when other required borrowing charges apply, they part ways and the APR shows those charges.
Does the APR Include Every Fee?
No. Ontario's rules leave some charges out of the cost of borrowing, including charges for optional services you choose to accept, default charges and prepayment charges or penalties.
Those are disclosed separately, so ask which charges are in the APR and which are not.
Where Do I Find the APR on My Paperwork?
In Ontario, the paperwork has to show the APR in writing before you sign, alongside the term, the total cost of borrowing and the total of all your payments. Ask for a copy and read it.
Can the APR Change During the Loan?
It can if the rate is variable. On a variable offer, the APR describes the loan on day one, and Ontario's rules require the paperwork to say the rate can change and explain how it will be set.
So, What Should You Look for in an APR?
Look at what it takes in and what it leaves out. The APR shows the yearly cost of borrowing more completely than the interest rate, but the total cost of borrowing on the paperwork shows what borrowing costs over the whole loan.
Compare two offers on the same amount and term, check whether either rate can change, and get every term in writing before you sign.
For the Carleton Place buyer in the opening, that means laying the bank's offer and the dealer's offer side by side and reading the total cost of borrowing on each.
When you are ready to compare, you can apply for financing with Carleton Place Ford ahead of your visit, on approved credit (O.A.C.).
If a line on an offer is unclear, contact our team in Carleton Place with your questions.
Visit us at 10441 Hwy 7, Carleton Place, ON K7C 0T6
Browse inventory, value your trade, apply for financing (on approved credit), book service, or contact the team.
Sales: (888)-910-3538 Parts: (888)-876-1102 Service: (877)-866-8810 Local: 613-257-3988
About the Author:
Kerry Irven is the Vice President of New and Used Automotive Operations for Heighton Automotive Group, a family-owned and operated automotive group serving communities across Eastern Ontario. Kerry began his automotive career in new-car sales, building his experience on the showroom floor and working his way through multi-store dealership operations.
With over 25 years in the automotive industry, Kerry has helped grow automotive businesses from one location with 40 to 50 vehicles in stock to more than 500 vehicles across 10 rooftops. His hands-on background in both new and used-vehicle operations gives him a practical understanding of what customers look for when shopping for their next vehicle.
Throughout his career, Kerry has always been actively involved in staff coaching and in understanding customer wants and needs, helping ensure the businesses he works with continue to adapt to what customers are truly looking for.
One of the most exciting chapters of his career has been the shift into modern automotive marketing, embracing new technology, transparent pricing, customer-first inventory strategies, and new ways to create a better vehicle-shopping experience.
Kerry has completed extensive automotive training, including certification through the Ontario Motor Vehicle Industry Council, involvement with the Used Car Dealers Association of Ontario, Canadian automotive dealer training, and multiple customer service courses.
Born and raised on a farm, Kerry has always valued family, hard work, and a practical, down-to-earth approach. Joining Heighton Automotive Group and working alongside Thomas Heighton and family, along with managing partners Kyle Lothian and Martin Gougeon, has allowed him to bring those same values into the car business. It has also allowed Kerry to continue following a simple philosophy: treat every customer exactly the way he would want to be treated.
Comments