The interest rate your lender charges you on your car loan will affect how much the loan will cost you. That’s why it’s always best to secure the lowest rate possible when applying for a car loan. But how can you lower your interest rate to avoid paying more than you have to?
Read on to find out some steps you can take to keep your car loan rate as low as possible.
Key Points
- The interest rate on your car loan has a direct impact on the overall cost of financing.
- You can lower your interest rate in several ways, including refinancing, choosing a shorter loan term, improving your credit score, and adding a cosigner to the loan contract.
- Shopping around with different lenders can help you find the lowest interest rate on a car loan based on your credentials.
How To Lower Your Car Loan Interest Rate In Canada
To keep your car payments as low as possible, securing a loan with a lower rate is key. Here are a few things you can do to lower your car loan interest rate:
Apply When You Have Good Credit
Your credit scores play a key role in your ability to secure a car loan at a lower rate. Why? Well, credit scores represent how likely a borrower will make their loan payments on time. The higher your score, the less risky you’ll seem to lenders and the more willing lenders will be to offer you a lower interest rate. As such, you’d be well-advised to keep your scores as high as possible.
How To Increase Your Credit Score
If your credit is currently lagging, there are steps you can take to give it a boost, including the following:
- Pay your bills on time and in full for each billing cycle
- Keep old credit accounts open, even if you don’t use them
- Don’t apply for too many loans within a short period of time
- Look for errors on your credit report and have them fixed right away
Ideally, you should adopt these tactics a few months before you apply for a car loan to give you enough time to make a significant improvement in your credit scores. Applying for a loan with higher scores will improve your chances of snagging a lower APR.
Learn more: How To Improve Your Credit Scores
Make A Larger Down Payment
A higher down payment means you won’t have to take out such a big loan. This reduces the risk for the lender as it lowers your loan-to-value (LTV) ratio, which represents your loan amount relative to the value of your vehicle. And with less risk usually comes lower interest rates. Not only will you benefit from a lower APR, but you’ll have lower car payments to make with a smaller loan amount.
For example, if you’re looking to purchase a $20,000 car with zero down payment, then your LTV ratio is 100%. However, if you provide a down payment of $5,000, your LTV ratio would drop to 75%. Lenders would likely provide a lower rate if you put a higher down payment because this can reduce the likelihood of loan default.
Add A Cosigner
A cosigner is a person who signs on to your car loan agreement and promises to take over the loan payments if you were to fail to do so yourself at some point. If your current financial and credit profile isn’t strong enough to ensure a lower APR, perhaps you can add a cosigner to your car loan. A cosigner with a strong credit profile will minimize the risk for the lender, who will be more open to giving you a lower APR as a result.
Negotiate Your Car Price
A lower car price means less money to borrow, helping you incentivize your lender to offer a lower APR. If possible, you may want to take a chance and negotiate with the car dealer before sealing the deal.
While you’re at it, consider negotiating the APR with the lender. Some lenders may be willing to discuss the potential to lower your rate. However, keep in mind that you’ll probably have better luck if you go into these talks with a strong financial and credit profile.
Shorten The Loan Term
Shorter car loan terms mean you have less time to fully repay your loan. But while this might mean higher car payments every month, you’ll pay much less in interest over the life of the loan.
Learn more: How To Lower Your Car Payment
Shop Around
Doing some comparison shopping among different lenders can help you find the lowest rate based on your financial and credit profile. You can do this quickly and easily using a loan comparison platform online, like Loans Canada.
Moreover, you can get pre-approved with multiple lenders without any impact on your credit. Once pre-approved, you can compare offers and choose one with a good interest rate.
Learn more: \What Is A Good Interest Rate On Car Loan?
Refinance Your Car Loan
If you already have a car loan, you could secure a lower APR by refinancing the loan with another lender. However, this option is only feasible if your credit and financial profile have significantly improved since you took out the loan.
It’s important to consider the penalty costs of refinancing and the savings you’d make by refinancing with a lower APR. Sometimes, the penalty of refinancing can offset any savings you’d make when refinancing with a lower interest rate.
To help you understand how a lower interest rate through refinancing can save you money, let’s illustrate using an example. Here, we’ll show the difference that reducing both the interest rate and loan term has on reducing your monthly payments:
| Current Loan Details | Refinanced Loan Details | |
| Loan Amount | $25,000 | $15,000 |
| Interest Rate | 8% | 5% |
| Loan Term | 60 months | 36 months |
| Monthly Payment | $506.91 | $449.56 |
| Total Interest Paid | $5,414.59 | $1,184.28 |
| Total Loan Cost | $30,414.59 | $16,184.28 |
In this example, you would be saving $4,230.31 in total interest, and your monthly payments would be reduced by $57.35.
Learn more: Car Loan Refinancing
Can You Lower Your APR Without Refinancing?
Refinancing involves taking out a new car loan to pay off your current loan at a lower interest rate, different loan terms, and a revised payment schedule. Many borrowers refinance when they’re able to secure a lower APR compared to the rate they were currently locked in at. As a result, it may save quite a bit of money over the life of the loan.
However, you might not want to refinance your car loan if the penalty costs outweigh the savings. The only other option you might have is renegotiating your car loan with your lender or paying off the loan entirely.
Should You Repay Your Car Loan Early?
Paying off your car loan early will not only save you on interest charges, but it also eliminate your car payments altogether. If your financial situation has vastly improved recently, or you’ve received an inheritance, tax refund, or simply have a second income stream, consider paying your car loan off early.
You can repay your car loan early in a few ways:
- Refinance Your Car Loan: As we’ve shown earlier, refinancing your car loan not only allows you to reduce your rate and therefore your monthly payments, but you can also use it to shorten your loan term to get out of debt earlier.
- Accelerate Your Payments: Making bi-weekly payments instead of monthly payments, for instance, allows you to put a little more towards the principal every year, which can help you pay your car loan off faster.
- Make A Lump Sum Payment Each Year: Depending on your loan contract, you may be able to make one lump sum towards the principal every year.
However, be sure to check the fine print in your car loan agreement. Some lenders include a clause in the contract which requires you to pay an early repayment penalty fee if the loan is broken early. If such a fee exists, make sure to find out how much this fee is, as the cost may be more than how much you’d pay in interest over the life of the loan.
Average Car Loan Interest Rates
According to Statistics Canada, the average car loan interest rate in Canada is currently 6.92%. However, depending on your credit scores and financial situation, car loan interest rates can be much higher, but no more than 35% (APR).
| July 2024 | August 2024 | September 2024 | October 2024 | November 2024 |
| 7.62% | 7.50% | 6.94% | 6.87% | 6.92% |
How Are Car Loan Interest Rates Calculated?
To secure a low car loan interest rate, you need to understand how lenders determine the rate they’re going to charge you. Your car loan interest rate is typically referred to as the Annual Percentage Rate (APR), which represents the total cost of borrowing a specific amount of money to buy a car. Your APR includes your interest rate and all fees involved.
To calculate your APR, your lender will consider various factors to ensure they’re charging you an appropriate amount, including the following:
- Credit Score – As mentioned, lenders prefer to work with borrowers with credit scores of at least 660 because higher scores means you’ve been responsible with your debts and are making timely payments.
- Loan Amount – Lower loan amounts mean less risk for the lender. Choosing a cheaper car and making a larger down payment so you won’t have to borrow as much can help you qualify for a lower rate.
- Loan Term – Shorter loan terms generally come with lower interest rates compared to longer terms as there’s less time for a borrower to default. Opting for a shorter term may also help you repay your loan faster, though the monthly payments will be higher.
- Debt-To-Income (DTI) Ratio – Lenders prefer to work with borrowers who have lower DTI ratios, as less of their income is committed to paying off current debts.
- Type Of Lender – Traditional lenders, like banks and credit unions, typically offer lower rates than online lenders, but they have much stricter requirements. Online lenders tend to have less stringent loan criteria, but in exchange for this, they may charge a higher interest rate.
- Other Fees – There may be additional fees associated with the loan that may be included in the APR, such as processing and origination fees. Negotiating the car loan fees can help you lower your APR.
Final Thoughts
Strengthening your financial profile and credit score when applying for a car loan will ensure you get the lowest interest rate on your loan. However, there are other strategies you can implement as well. Consider making a high down payment, negotiating with your lender, refinancing, shortening your loan term, or adding a cosigner to your loan. Anything you can do to reduce your APR can lead to significant savings over the long run.
