How To Lower Your Car Loan Interest Rate

How To Lower Your Car Loan Interest Rate

Written by Lisa Rennie
Fact-checked by Caitlin Wood
Last Updated July 18, 2022

The interest rate your lender charges you on your car loan will directly determine 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.

How To Lower Your Car Loan Interest Rate

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:

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. 

Improve Your Credit 

As mentioned, your credit scores play a key role in your ability to secure a car loan at a lower rate. As such, you’d be well-advised to keep your scores as high as possible.

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. 

Make A Larger Down Payment

A higher down payment means you’ll need a lower loan amount. This reduces the risk for the lender as it lowers your LTV ratio. 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 down to 75%. Lenders would likely provide a lower rate if you put a higher down payment because the likelihood of you defaulting on the loan and the car value being less than what you owe is lower. 

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. 

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 eliminates 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.

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.

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AmountInterest Term(Months)
Loans Canada Logo - Bad Credit Loans Canada$500 - $50,000Up to 46.96%12 - 84Learn More
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Carloans411$5,000 - $40,000Varies12 - 72Learn more
Car Loans Canada$7500 - $59,9953.95% +12 -96Learn more
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Splash Auto Finance by RifcoUp to $50,000Varies12 - 84Learn more
SafeLendUp to $50,0008.99% +12 - 72Learn more

Average Car Loan Interest Rates

According to Statistics Canada, the average car loan interest rate in Canada is around 5%. However, depending on your credit scores and financial situation, car loan interest rates can go up to 40% or higher, but no more than 60%. 

December 2021January 2022February 2022March 2022April 2022
4.985.095.115.235.52

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:

Your Credit Scores

Lenders prefer to work with borrowers with credit scores of at least 660. Higher scores means you’ve been responsible with your debts and are making timely payments. 

The higher the credit score, the lower the APR, considering other factors. Credit scores under the 660 mark, on the other hand, usually mean higher APRs, which make car loans more expensive.  

How Your Credit Scores Can Affect Your Interest Rates

Credit RangeEstimated Interest Rate Based On Credit RangeExplanation 
Excellent Credit Score (760 - 900)1.5% to 10%Borrowers within this credit range will usually be able to qualify for the best interest rates. 
Very Good Score (725 - 759) 3% to 17%Individuals in this credit range will also generally qualify for the best interest rates. 
Good Credit Score (660 - 724)5% to 29.99%Interest rates offered to borrowers within this credit range are typically very affordable, but may not be as low as the excellent credit range.  
Fair Credit Score (560 - 659)15% to 35%Borrowers who fall in the “fair” credit score range may not only find it difficult to qualify for a loan but will usually be charged much higher interest rates.
Poor Credit Score (300 - 559)18% to 46.96%Borrowers with poor credit generally have a hard time finding a lender who will approve them. They are also charged high-interest rates due to their risky credit profile.
Note: These rates are for illustrative purposes only. Actual charged rates will depend on the lender, your credit and your overall financial profile.

Your Payment History

Your payment history usually has the biggest impact on your credit scores. As such, it can affect your ability to secure a loan at an affordable APR. If you’ve been diligent with all your bill payments, your credit history will be positively impacted. But a history of late or missed bill payments means a lower credit score, which will make it more difficult for you to secure a car loan at a lower APR. 

Your Loan Amount

The price of the vehicle isn’t the only thing that dictates how much you have to borrow. If you can make a larger down payment, you won’t have to borrow as much. Lower loan amounts mean less risk for the lender. In this case, you may be able to score a lower APR as a result.  

Your Loan-To-Value (LTV) Ratio

Your LTV represents the loan amount relative to the value of the vehicle. The lender will look at your LTV ratio when assessing the risk of lending because they want to ensure that the loan they provide isn’t too far off from the value of the car. Generally speaking, high LTV ratios are a higher risk for lenders, which means you will likely be charged a higher APR to offset this risk. 

The Loan Term

Lenders may charge a lower interest rate if you opt for a longer car loan term, however, that doesn’t mean it’s cheaper. A longer loan term could lower your APR, but you’ll pay more in interest over the life of the loan compared to a short-term car loan with a higher interest rate (depending on how high). 

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.

Car Loan Interest Rate FAQs

Can I get a low-interest rate with bad credit?

Securing a low APR rate on a car loan with bad credit may be difficult. Typically, a low credit score often heightens the risk of lending for the loan lender. However, including a co-signer with a high credit score may help lower your interest rate. 

What is considered a good interest rate on a car loan? 

According to Statistics Canada, the average car loan interest rate hovered around 5%. However, interest rates for cars can easily range up to 46.96% depending on your financial and credit profile. That said, a good interest rate would generally be anything around the average car loan interest rate. 

Will securing a shorter-term lower the cost of my car loan?

You should avoid taking a long-term loan. Lower monthly payments may seem appealing, but the longer you’re tied up with a loan, the more interest you’ll pay. Car loans typically range from 12 to 84 months, and choosing the shortest time you can afford can save you thousands of dollars in interest. If you can’t afford the full amount of the car but have some money for the down payment, you should take the chance and invest your money into your car. Overall, you will end up paying less interest as the total amount you have to borrow is less.

Can I get a 0% financing car loan? 

0% financing is not a common practice among banks and alternative lenders, it is usually available through car dealerships. However, 0% financing offers usually have high requirements such as high incomes and high credit scores. 

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, shortening your loan term, or adding a cosigner to your loan. Anything you can do to reduce your APR will lead to significant savings over the long run.

Lisa has been working as a writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same. She's used a variety of financial tools over the years and is currently growing her money with Wealthsimple, while stashing some capital in a liquid high-interest savings account so that she always has a financial cushion to fall back on. She's also been avidly using her Aeroplan TD credit card to collect as many Aeroplan points as possible to put towards her travels!

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