Buying a new car is an expensive endeavour, but you can make it a little more affordable by securing a low interest rate. In addition to the purchase price of the car, there’s also the interest rate your lender charges you that determines the overall cost of your car.
Luckily, there are some things you can do to secure the lowest possible rate on car financing.
Key Points
- The interest rate you’re charged on a car loan significantly impacts the overall cost of financing a vehicle purchase.
- Key factors that influence your car loan interest rate include your credit score, loan term, down payment, and loan amount.
- To ensure you’re getting the lowest rate, you can shop around with multiple lenders, improve your credit score, look out for manufacturer promotions, or offer a higher down payment.
What Is The Best Interest Rate On A New Car Loan?
A good rate on a new car loan is one that is below the current average. Right now, the average car loan rate in Canada is 6.76%, as per the latest data collected by Stats Canada. So, if you can snag anything below this threshold, you’re likely getting a good deal.
Learn more: What Is A Good Interest Rate On Car Loan?
Where Can You Get 0% Financing On New Cars?
Dealerships sometimes offer 0% financing deals as a way to attract new customers. Various carmakers and dealerships offer such incentives from time to time, though they are not always readily available, and when they are, they may only be available on specific models. Further, you’ll likely need good credit to qualify.
To find these deals, you’ll need to keep your eye out and check with local dealerships and the carmaker’s website for current offers. If you do spot a 0% financing deal and meet the credit criteria to qualify, you can realize significant savings on a new car purchase.
How Can You Get The Best Financing Rate For Your New Car?
To secure the lowest possible rate on your car loan, consider the following tips:
Get Pre-Approved With Multiple Quotes
Compare new vehicles, dealerships, and lenders in your area. You’ll find that every one of them offers different financing rates, loan amounts, and approval conditions. After you fill out some simple forms, they should also give you a free quote, so you’ll have an idea of what rate you’ll qualify for.
Getting pre-approved will not only help you understand if you’ll qualify for a loan, but it can also help you narrow down your car search, shop smarter and save money by finding you the lowest financing rates. Use an online tool like Loans Canada’s CompareHub to compare lenders and their offerings and find the lowest rates.
Look For Dealer Or Manufacturer Incentives
Car dealerships and automakers often offer special financing promotions to attract buyers, such as 0% or low-rate financing. These deals can translate to significant savings, though they’re typically reserved for buyers with good credit.
Offer A Larger Down Payment
Offering the largest down payment you can comfortably afford can also help you secure a lower rate, especially if you don’t have good credit. Plus, it can reduce the overall size and length of your debt. Most experts suggest that you put down at least 20% of the car’s asking price.
Find A Co-Signer
If your income and/or credit aren’t great, a financially stable friend or family member can cosign your application and agree to take over your payments if you can’t afford them. Due to this extra security, your lender may give you a better rate than you would get on your own, especially if you have bad credit.
Choose A Shorter Loan Term
While a longer loan term may reduce your monthly payments, you may pay a higher interest rate and pay more in interest over the life of the loan. On the other hand, a shorter loan term may come with a lower rate and less in interest paid over the life of the loan.
Build Your Credit Score
Prior to applying, be sure to increase your credit score by paying off existing debts, checking your credit report for errors and avoiding any other new credit. The closer your score is to 900, the easier it would be for you to make payments (theoretically), so you may qualify for a lower rate.
Organize Your Finances
One of the best ways to earn a low rate is to show your lender that you can afford all associated costs when they inspect your finances. Be sure to have a solid job for at least a few months prior, and enough extra money saved to cover a down payment and any other future costs.
Pay Down Your Debt
Your income and other debts (mortgage, credit cards, etc.) let the lender know if you’ll be able to afford your future loan payments. Even with a high income, a high level of debt can leave you with little money left over each month to cover additional car loan payments. So, consider taking some time to pay down your debt to improve your debt-to-income (DTI) ratio, which can increase your chances of getting a car loan with a lower interest rate.
Choose A Car With A Lower Rate Of Depreciation
The more years and mileage your car has, the more value it loses. If the loan is secured against your car as collateral and you go into default, the lender has to repossess and resell a less valuable car. As such, the faster your car is estimated to depreciate, the higher your interest rate will be.
Consider choosing a vehicle with a high resale value, which will reduce the lender’s risk and therefore help you secure a lower interest rate. Currently, the vehicle models with the highest 5-year resale value include the Honda Civic, Honda Accord, and Hyundai Palisade.
Do Fixed Or Variable Rate Car Loans Have The Best Financing Rates?
If you’re lucky, you might be able to lock in a low fixed financing rate, which won’t change during your payment term. However, if you have a variable rate or you don’t find a good fixed rate in time, your car payments can fluctuate in size when the Bank of Canada’s benchmark rate rises or drops.
The choice between a fixed versus a variable rate depends on a few key factors. More importantly, consider whether rates are expected to increase or decrease in the near future. If rates are expected to rise soon, it may be best to opt for a fixed rate so you can protect your loan payments from rising. On the other hand, if rates are expected to dip, you may want to choose a variable rate.
Another factor to consider is how long you plan to hold on to your car or how quickly you plan to repay your loan. If you think you’ll be able to pay off your car loan quickly, a variable might work if it’s lower than the fixed rate available. But if you prefer a longer loan term to keep payments low, then perhaps a fixed rate may work better for you.
Where Can You Find The Best Car Financing Rates in Canada?
Generally speaking, bank financing comes with the lowest rates. Banks typically require high credit scores as part of their loan criteria, which minimizes the bank’s risk. The bank would then be willing to offer lower rates to their clients as a result.
However, if you don’t have good credit, you may still be able to qualify for a car loan with an alternative lender. That said, you likely won’t get much of a deal on financing, as the lender’s risk is elevated due to your lower credit score.
| Amount | Interest | Term (Months) | ||
|---|---|---|---|---|
 | $500 - $50,000 | Up to 35% | 12 - 84 | Learn more |
 | $7,500+ | Varies | 24 - 96 | Learn more |
 | $500 - $35,000 | Starting at 29.99% | 9 - 60 | Learn more |
 | $500 - $10,000 | 12.99% - 34.99% | 9 - 60 | Learn more |
 | $5,000 - $40,000 | Varies | 12 - 72 | Learn more |
 | $5,000 - $45,000 | 4.90 % - 29.95% | 36 - 72 | Learn more |
 | Varies | 11.9% + | 12 - 84 | Learn more |
 | Up to $50,000 | Varies | 12 - 84 | Learn more |
The Basics Of New Car Financing
Before looking at strategies for snagging the lowest interest rate, it’s helpful to understand the key components of auto financing:
- Principal: The amount you borrow to buy the car.
- Interest Rate: The percentage of the loan amount that your lender charges for lending you money.
- Loan Term: The length of time you have to pay off the loan, which ranges from 24 to 84 months.
- Monthly Payment: The amount you pay every month, which includes principal and interest portions.
Learn more: Financing A New Car
Benefits Of A Securing A Low Interest Rate On A New Car Loan
Securing a low interest rate on a car loan offers key advantages, including the following:
Lower Total Loan Cost
A lower rate means you’ll pay significantly less over the life of the car loan. Depending on how low the rate is and your loan amount, you could save hundreds or even thousands of dollars over the loan term in interest costs,
Lower Monthly Payments
A lower rate reduces the amount of interest added to your principal every month, which decreases your monthly payment amount. This frees up your cash flow, allowing you to use that money for other expenses.
Faster Loan Repayments
With less interest to pay, you can pay off your car loan more quickly. The sooner your car loan is paid off, the sooner you’ll be debt-free.
Increased Affordability
If you’re paying less in interest, you may be able to afford a better (and potentially more expensive) vehicle, since more money would be going toward the principal portion than interest.
Learn more: How To Lower Your Car Loan Interest Rate
Final Thoughts
Securing the lowest interest rate for a car purchase can translate into significant savings. As such, it’s in your best interests to get the lowest rate possible on your car loan. You can do this by improving your credit score, comparison shopping for the best rates, and timing your purchase to take advantage of dealer promotions.
