If you’re in the market for a new or used car, it’s likely that you’ll need to secure some financing for your purchase. When applying for a loan, you’ll find that the interest rate is an important factor in determining exactly how much the loan will cost you. The interest rate identifies how much extra money you will be paying back in addition to the principal. Interest rates vary, and to get a competitive rate, you will need to have a strong financial status – capital, income, and credit rating. Let’s take a look at car loan interest rates in Canada.
Average Car Loan Interest Rates In Canada
The average car loan rate for Canadians is around 5% to 6% . However, it’s important to remember that this average number does not necessarily mean you will have this rate. Depending on someone’s financial situation, car loan interest rates can be significantly higher.
Here are the average interest rates as shown on Statistics Canada’s website:
| January 2022 | February 2022 | March 2022 | April 2022 | May 2022 |
| 5.09% | 5.11% | 5.23% | 5.52% | 5.80% |
Where Can You Get A Car Loan In Canada?
| Amount | Interest | Term (Months) | ||
|---|---|---|---|---|
 | $500 - $50,000 | Up to 46.96% | 12 - 84 | Learn more |
 | Varies | 8.49% + | 24 - 96 | 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 |
 | $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 |
How Do Lenders Decide What Interest Rate To Charge You?
When it comes to deciding the interest rate for a car loan, lenders will consider many different factors, including:
Car Loan Terms
When buying a new car, lenders often offer longer loan terms to accommodate new buyers. However, the longer loan term will certainly be accounted for in the interest rate. Generally, a longer loan term equates to a higher interest rate and a higher overall price.
Vehicle Status
If you opt for a secured personal loan, your car will act as security or collateral in the event that you cannot pay the lender back. Cars are quickly depreciating assets; so, lenders will account for that throughout the term of the loan. If you cannot pay your loan and your car has depreciated or malfunctioned, the lender takes a risk. They may increase the interest rate after some time has passed. Furthermore, old cars tend to encourage higher interest rates. New cars may encourage lenders to offer lower interest rates.
Credit Score
Experts recommend knowing your credit score before you apply for a car loan. Your credit score is important to a lender, as it lets them look at your history of debt repayment. If you have a lot of debt and expenses, lenders will see you as a higher risk borrower, resulting in a higher interest rate. If you have a great credit score, you have a higher chance of securing a lower interest rate.
Down Payment
The down payment is a percentage of the purchase price of the car, usually, 20%, paid upfront. Experts recommend saving for a longer period of time to secure a bigger down payment for your loan. This can help you achieve a lower interest rate. Some lenders will offer loans without the requirement of a down payment; however, these deals usually have higher interest rates.
Debt-to-Income Ratio
Your debt to income ratio is your recurring monthly debt payments (loans, credit cards, debt, mortgage payments) divided by your recurring monthly income (investment dividends, salary, bonuses, etc.) Lenders like to look at this ratio because it’s a good indication of how likely you are to pay off your new loan.
For example, if you have a high discrepancy between your monthly debt and income, it will be harder for you to secure a loan. And even if you do secure one, your interest payments will be higher to account for the extra risk the lender is taking. It’s also important to note that having debt can be better than having no debt, as lenders will be hesitant to lend to someone who cannot show any history of repayment.
Employment Stability
Lenders might ask you for proof of employment, like pay stubs, bank statements, or credit references. If you have a steady employment history, lenders will feel more confident in your ability to secure income for a long period of time, and in turn, your ability to pay back your loan.
The Economy
The economy is a big factor for lenders in determining interest rates. If business is good and people are working steadily, interest rates tend to be higher. However, in times of economic distress, such as Canada’s 2008 recession, or this year’s COVID-19 pandemic, interest rates will be lower to match the general economic struggle.
Calculating Your Car Loan Cost
Let’s take a look at how your car loan payments are affected by different interest rates. In the second column below, a low-interest rate of 4.5% is applied to a car loan of 4 years. The last column shows a high-interest rate of 19.5% applied to that same loan.
| Low-Interest Rate | High-Interest Rate | |
| Loan Amount | 20,000 | 20,000 |
| Interest | 4.5% | 19.5% |
| Term Length | 4 years | 4 years |
| Monthly Payment | $417 (principal) +$18.75 (interest) = $435.75 | $417 (principal) + $81.32 (interest) = $498.32 |
| Total Amount Paid | $20,916 | $23,919.35 |
| Total Interest Paid | $900 | $3,909.35 |
As you can see, interest rates have a strong effect on the total amount of money you pay for your car loan. The 19.5% interest rate translates to roughly an additional $3,100 on your total price when compared to the 4.5% interest rate. If you have low credit, a small down payment or no down payment, or problematic employment history, you are more likely to have a car loan resembling the last column, with a high-interest rate. Your goal is to have something closer to the first column, which shows a lower interest rate.
How Do You Get A Better Rate For A Car Loan?
There are many ways for you to influence your chance of getting a better rate. Let’s take a look at a few of them:
Improve Your Credit Score Before Applying
Improving your credit score doesn’t happen overnight. Over time, you need to show that you are responsible with your debts. This includes making your credit card payments on time and keeping the balance within 30% of your limit and building a diverse but manageable combination of debt. For more information about improving your credit score, check out Loans Canada’s article on Improving Your Credit Score.
Increase Down Payment
No-money-down car loans may seem like a great deal, especially if you have trouble saving; however, this route can almost certainly guarantee you a higher interest rate. Consider waiting a little longer before purchasing your car so that you have a sizeable down payment. Experts recommend at least 20%.
Get A Co-signer
If your credit is low, or if you can’t afford to make a decent down payment on your car loan, lenders might look for an alternative way to ensure lending to you isn’t as big a risk. Getting a co-signer is a great way to get approved for a loan if you have poor credit or strengthen your application if you’re otherwise financially stable. Lenders will look at your application and consider both your income as well as your co-signer’s income, increasing your chance for approval and a better interest rate. Adding a co-signer lessens the risk to the lender, giving you extra space to negotiate a lower rate.
Compare, Research, and Consider Pre-Approval
If you want to be prepared and well informed about the different deals and interest rates available to you, you might want to consider pre-approval for a loan. Don’t worry – a pre-approval won’t damage your credit score. On the contrary, they can actually be quite helpful in helping you assess what you’re eligible for. Furthermore, being able to compare rates with loans you are pre-approved for gives you more knowledge and in turn more power in negotiating a rate with a dealership.
Negotiate
Car dealerships are businesses, so their goal is to make more money. That being said, it’s unlikely that they will offer you the lowest possible interest rate right off the bat, even if you have a strong credit history. Don’t be afraid to negotiate, especially if you have good credit, a large down payment, and/or a co-signer. Additionally, make sure to research average rates so that you’re well prepared for negotiation.
Additional Reading
Average Car Loan Interest Rates FAQs
What is a good car loan interest rate?
What is the highest interest rate on a car loan by law?
Are interest rates on used cars lower than on new cars?
Final Thoughts
Interest rates are far from arbitrary. As you can see, many factors play a role in determining a loan’s interest rate. By considering each factor carefully, you can have some control over how high your interest rate is.
