APR vs Interest Rate: What's the Difference?
APR includes fees and interest, while the interest rate doesn't. Here's why comparing APRs — not just interest rates — gives you the true cost of a car loan.
The interest rate and the APR on a car loan are often different numbers — and understanding the difference can save you from overpaying. The interest rate is what you pay on the principal. The APR includes the interest rate plus any fees, giving you the true cost of the loan.
Interest Rate vs APR
- Interest rate: The cost of borrowing the principal, expressed as a percentage. This is the base rate before any fees.
- APR (Annual Percentage Rate): The interest rate plus certain loan fees, expressed as a percentage. This represents the true annual cost of the loan.
Example
- Loan amount: $25,000
- Interest rate: 9%
- Loan fee: $500
- APR: 9.42%
The APR is higher because it factors in the $500 fee. When you compare loans, the APR is the number that tells you which is actually cheaper.
What Fees Are Included in APR?
In Canada, car loan APRs typically include:
- Loan origination fees — Charged by some lenders to process the loan
- Documentation fees — Dealer paperwork fees
- Administration fees — Lender processing charges
Not all fees are included in the APR. Fees that are typically not included:
- Taxes (GST/HST/PST)
- License and registration fees
- Insurance products (gap insurance, extended warranties)
- Optional add-ons
Why APR Matters
Two loans can have the same interest rate but different APRs — and the one with the higher APR costs more.
| Lender | Interest Rate | Fees | APR |
|---|---|---|---|
| Lender A | 9% | $0 | 9% |
| Lender B | 9% | $1,000 | 9.8% |
| Lender C | 8.5% | $1,500 | 9.7% |
Lender C advertises a lower interest rate (8.5%), but the higher fees make the APR (9.7%) worse than Lender A's 9% with no fees. Always compare APRs, not just interest rates.
How to Compare Car Loans
- Ask for the APR — Not just the interest rate. In Canada, lenders are required to disclose the APR.
- Compare the same term — A 60-month loan at 9% APR is not the same as a 72-month loan at 9% APR. Compare identical terms.
- Check what's included — Ask which fees are in the APR and which aren't
- Watch for add-ons — Dealers may add insurance products or warranties that increase the loan amount without changing the APR
- Get pre-qualified — See your APR before you shop so you can compare dealer offers
How Much a Fee Difference Costs
On a $25,000 loan over 60 months:
| APR | Monthly Payment | Total Cost |
|---|---|---|
| 9% | $521 | $31,260 |
| 9.8% | $530 | $31,800 |
| 10.5% | $539 | $32,340 |
A 1.5% APR difference costs $1,080 over the life of the loan.
Zero-Percent Financing and APR
Manufacturer 0% financing offers sometimes have hidden costs. The "0%" is the interest rate, but there may be fees that result in a non-zero APR. Also, you often have to choose between 0% financing and a cash rebate — and the rebate can be worth more.
The Bottom Line
Always compare APRs, not just interest rates. The APR gives you the true cost of the loan, including fees. Get pre-qualified to see your APR before you shop, and use our Car Payment Calculator to estimate your payment.
See also: what interest rate can I get? and how car loan interest is calculated.
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Affordrive does not guarantee financing approval. Financing decisions, rates, terms and vehicle availability are determined by the applicable lender and dealership.
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