Having a car is a must, especially if you rely on it to commute to and from work. A new car, in particular, is especially nice to have given the more up-to-date date features and pristine condition that comes with new vehicles. But considering the expense of new cars, applying for a car loan can make it easier for you to cover the purchase price. The question is, how much does financing a new car cost?
Key Points On Financing A New Car
- The cost to finance a new car varies greatly depending on factors like the interest rate, down payment, and loan term.
- You can lower the cost of financing a new car by keeping a good credit score, looking out for promotional rates from dealerships, and shortening your loan term.
- You also have the option to lease a car, which often comes with lower monthly payments than financing and lets you drive a new vehicle more often.
How Much Does Financing A New Car Cost?
The cost of financing a new car depends on many factors, including the purchase price, down payment, interest rate, and loan term. Generally speaking, car buyers can expect to pay a few hundred dollars a month or more, though the exact amount varies greatly.
Thanks to high car loan interest rates right now, the average auto loan payment is currently around $880 per month. That number is even higher for roughly one-third of new car buyers who finance their purchases, who pay as much as $1,000 per month or more on car loan payments.
General Features Of New Car Financing
Here are the key features of new car financing:
- Loan Term: 12 to 96 months
- Interest Rate: The current average interest rate on auto financing is 6.92%, though the rate can go up to as much as 35% (the maximum rate under the Criminal Code), depending on the lender and your credit health.
- Average New Car Price: Currently, the average new car price is $66,422, as per Auto Trader.
Learn more: What Is The Average Price Of A Car In Canada?
Are New Cars Loan Rates Lower Than Used Car Loans?
Yes, new car loan interest rates are generally lower than used car loan rates. That’s because new cars are typically considered lower risk to lenders because they have fewer mechanical issues and higher resale value compared to used cars. Lenders will often charge higher rates on used car loans due to the depreciation of the vehicle and potentially more mechanical concerns.
So, while new cars may have a higher ticket price, they may be more affordable when it comes to financing thanks to the potentially lower monthly payments.
Learn more: What Is The Average Car Loan Interest Rate In Canada?
Factors That Affect The Costs Of Financing A New Car
The following factors affect the cost of financing a new car:
Loan Amount
The bulk of your financing payments comes from the amount you borrow, or the principal amount. But your loan amount also plays a role in the interest rate you may be offered, which plays a direct role in your financing costs. Generally speaking, the larger your loan debt is, the riskier you’re considered, so you’ll often be charged more interest.
Annual Percentage Rate (APR)
Your APR can drastically affect the amount of interest you pay over the life of your car loan. A lower rate will reduce the overall cost of your car loan, while a higher rate will increase the total cost. Usually, if you have a strong income and credit score, you’ll be more likely to qualify for a lower APR.
Term Length
The length of the loan term will determine the amount you pay in interest over the life of the loan. Longer loan terms typically mean more interest paid overall, but monthly payments are typically smaller and more affordable. Shorter loan terms, on the other hand, might mean higher monthly payments, but you’ll pay less interest overall.
Down Payment
If you offer a large down payment on your new car, you won’t have to borrow as much. In turn, you’ll reduce your monthly payments and the amount of interest you pay on your loan. Most vehicle experts recommend a down payment of at least 20% of the vehicle’s purchase price.
Credit Score
Ranging from 300 to 900, your credit score shows the lender how you’ve handled your past credit products. If you have bad credit, your lender may perceive you as a riskier borrower. The lower your score is, the higher your interest rate will be, and vice versa.
Trade-Ins
If your current vehicle still has some resale value, you may be able to trade it in at your dealership in exchange for a reduced price on your new car. While you probably won’t get what your car is truly worth out of the trade, it’s still a good way to reduce the amount you need to borrow for a new car purchase.
Sales Tax
Another thing you need to consider is the sales tax that the car dealer charges. These taxes vary depending on the province or territory you buy your car in. For example, in Ontario, you’ll be charged 13% HST on a new car purchase, while in Alberta, you’ll only pay 5% GST when buying a car.
Payment Frequency
Your payment frequency may affect the cost of financing. While most car loans come with monthly payments, some lenders may offer other repayment schedules, including weekly, biweekly, and semi-monthly payments. More frequent payments can help reduce the total interest paid over the loan term because the principal is paid down more quickly.
How To Calculate Your New Car Financing Costs
An easy way to calculate the total cost of financing a new car is to use an online car loan calculator. You’ll need to plug in specific figures, including the following:
- Vehicle price
- Down payment
- Sales tax (based on your province)
- Interest rate
- Loan term
Once you plug in these numbers, your online car loan calculator will provide you with the following:
- Total interest paid
- Total loan amount
- Monthly patent amount
To illustrate how much a new car loan can cost you, let’s use an example:
| Car Price | $66,422 |
| Down Payment (20%) | $13,284 |
| Sales Tax (13%) | $8,634 |
| Total Loan Amount (car price + sales tax – down payment) | $61,772 |
| Interest Rate | 6.92% |
| Loan Term | 60 months |
| Monthly Payment Amount | $1,221 |
| Total Interest Paid | $11,477 |
| Total Paid | $73,260 |
Learn more: What Is The Average Car Payment In Canada?
Other Cost To Consider When Financing A New Car
When buying a new car at a dealership, you’ll need to account for additional fees that they may charge, including the following:
- Freight And PDI (Pre-Delivery Inspection) Fees: This fee covers the cost to have the vehicle shipped to the dealership by the car manufacturer, along with inspection and testing prior to delivery.
- Administration Fees: These fees cover the administrative cost of processing paperwork, contracts, and registration.
- Government Levies: These mandatory fees are required by the government when buying a vehicle in Canada. The exact amount of these fees varies by province and vehicle type.
- Extended Warranties: This is an optional fee, but some dealerships may add it to the price, which buyers should be wary of.
Where Can You Finance A New Car?
Multiple sources of vehicle financing are available, each with its own set of benefits and drawbacks.
| Banks | Banks offer car loans through partner dealerships. You simply need to go to an affiliated dealership and ask for your specific bank financing options. |
| Online Lender | There are also many private lending companies that offer car loans. Like banks, many of them have partnerships with various dealerships. They’ll connect you with the ones you’re pre-approved for based on the car you want. |
| Auto Dealerships | Many dealerships offer in-house financing. Some dealerships may offer better incentives than financial institutions (especially for new cars), such as 0% interest for the first few months, easier approval restrictions, and more negotiability. The main benefit of applying with an alternative lender is that it’s usually much easier to qualify, especially if you have bad credit. |
Should You Finance Or Lease A New Car?
Financing is not the only option you have when buying a new car. There is also the option to lease. Both options come with their own perks and drawbacks, and the right choice depends on your financial situation, long-term goals, and driving habits, and long-term goals.
Let’s compare leasing versus financing side-by-side to help you determine which option suits you best:
| Feature | Leasing | Financing |
| Ownership | -You don’t own the vehicle -Vehicle must be returned or purchased at the end of the lease | You own the car once the loan is repaid |
| Payments | Lower monthly payments | Higher monthly payments |
| Mileage Restrictions | -Mileage limits apply -Exceeding mileage limits incurs fees | No mileage limits |
| Customization | Not permitted | Customization is allowed |
| Upfront Costs | Typically lowerSmall down payment may be required | Usually higher, often includes a sizable down payment, taxes, and fees |
Learn more: Leasing A Car In Canada
What Are The Pros And Cons Of Financing A New Car?
Let’s take a look at some of the main benefits and drawbacks of financing a new car so you can figure out if it’s the right option for you.
Pros Of Financing A New Car
Benefits of financing a new car include the following:
- Positive Equity – If the resale value of your car outweighs the amount of money you’ve invested, it means you’ve built positive equity. As such, the car becomes an asset that you can use as collateral to secure another loan, such as a secured personal loan.
- Less Money Upfront Compared To An All-Cash Deal – Financing allows you to buy a vehicle without having to first save up thousands of dollars to cover the full purchase price upfront. That means you can get on the road sooner than later.
- Low-Rate Incentives – As mentioned, applying with the right dealership can lead to many perks, such as 0% interest for the first few months. That said, you’ll typically need good credit to benefit from this promotional rate.
Cons Of Financing A New Car
Drawbacks of financing a new car include the following:
- Additional Costs – On top of the purchase price of the vehicle, there are other costs associated with financing, including interest and documentation fees.
- Risk Of Negative Equity – Most new cars depreciate rapidly, losing around 20% of their value almost immediately and an additional 10% every year afterward. If you pay more for the car than it’s worth, you could end up with negative equity.
- Strict Qualification Criteria – You typically need good credit and a strong income to qualify for a car loan. If you don’t possess these traits, you may find it difficult to get approved for financing.
Final Thoughts
Financing a new car can be an expensive endeavour, and the total amount you pay depends on multiple factors, including the down payment, loan term, interest rate, and sales tax, among other things. Be sure to carefully consider these factors to make a more informed decision about your auto loan. Before committing to new car financing, you’d be well-advised to shop around for the best interest rates and offers, which you can quickly and easily do with Loans Canada’s CompareHub.
