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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.
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:
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.
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:
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.
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.
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.
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.
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.
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.
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.
| Amount | Interest | Term (Months) | ||
 | $500 - $50,000 | Up to 46.96% | 12 - 84 | Learn more |
 | $500 - $35,000 | 29.99% - 46.96% | 9 - 60 | Learn more |
 | $500 - $10,000 | 12.99% - 39.99% | 9 - 36 | Learn more |
 | $5,000 - $40,000 | Varies | 12 - 72 | Learn more |
 | $7500 - $59,995 | 3.95% + | 12 - 96 | 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 |
 | Up to $50,000 | 8.99% + | 12 - 72 | Learn more |
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 2021 | January 2022 | February 2022 | March 2022 | April 2022 |
| 4.98 | 5.09 | 5.11 | 5.23 | 5.52 |
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:
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.
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.
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 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.
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).
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.
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.
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Lisa has been working as a personal finance 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.
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