The Annual Percentage Rate — the APR — is the standardized way of expressing the total cost of borrowing as a yearly rate. Under both federal Truth in Lending law and California’s Rees-Levering Act, the APR must be disclosed to the buyer. The APR is the single most important number for comparing financing offers because it captures not just the stated interest rate but also certain fees and charges that are part of the cost of credit.
The APR calculation is defined by Regulation Z, which implements the Truth in Lending Act. It’s a specific mathematical calculation, and your dealer management system or your financing contract software should compute it automatically. However, you should understand what it represents so you can explain it to customers and verify that the numbers on your contracts are correct.
Here’s a common point of confusion: the APR and the stated interest rate are not always the same number. The stated interest rate is the rate used to calculate the monthly interest charges on the outstanding balance. The APR may be slightly higher than the stated rate because it includes certain fees that are treated as part of the finance charge. For simple interest auto loans without prepaid finance charges, the APR and the stated rate are often the same, but you should always verify.
When presenting financing options to a buyer, the APR must be disclosed prominently. It cannot be buried in fine print. It cannot be stated verbally and omitted from the written contract. The buyer must be able to see the APR on the face of the contract before signing.