If you’re in the market for a new or used car and need to finance the purchase, the purchase price is not the only figure you should look at. The rate you’ll pay on your car loan also matters.
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 and credit profile. That’s why it’s imperative that you do what you can to secure the lowest possible rate. Let’s take a look at car loan interest rates in Canada.
Key Points
- Car loan interest rates in Canada can range a great deal due to several factors, including your credit score, down payment, and whether you’re buying a new or used vehicle.
- In Canada, a good interest rate for a car loan is somewhere around 7% to 8%.
- A lower rate can help you save money in interest payments and lower the overall cost of your vehicle purchase.
Average Car Loan Interest Rates In Canada
The average car loan rate for Canadians is around 7.59%, according to Statistics Canada. This figure is from June 2024, the latest data available.
However, it’s important to remember that this average number does not necessarily mean you will get this rate when you apply for auto financing. Depending on your financial situation, car loan interest rates can be higher or lower.
Average Car Loan Interest Rates In Canada: Over The Years
Here are the average interest rates for the last few years, as shown on Statistics Canada:
| June 2024 | 7.59% |
| June 2023 | 7.60% |
| June 2022 | 6.15% |
| June 2021 | 4.39% |
Are Car Loan Interest Rates Different For Used Vs New Cars?
Generally speaking, new cars tend to come with lower financing rates than used cars. That’s because there’s higher risk associated with used vehicles, which tend to be more likely to experience mechanical issues. Further, it can be more difficult to estimate the resale value of a used car, especially as it depreciates.
Rate differences can range and vary by lender and borrower. And if you have bad credit, you can expect your rate to be higher to offset the lender’s risk of lending money to a potentially riskier borrower. That said, you can expect the following interest rate ranges for new cars versus used cars:
- New or used car financing rates: 7.99% – 12.99% (APR)
- Bad credit financing rates: 13% – 35% (APR)
How Do Car Loan Lenders Decide What Interest Rate To Charge You?
When it comes to deciding the interest rate for a car loan, lenders will consider several factors, including:
Car Loan Terms
When buying a new car, lenders often offer longer loan terms to accommodate new buyers. However, a longer loan term can equate to higher interest rates and a higher overall price. It can also increase the risk of negative equity somewhere down the line, which means the value of your car is less than what you still owe on your loan.
Vehicle Condition
When you take out a car loan, your vehicle will act as collateral for the loan. As such, lenders will evaluate your car’s condition to lower their risk in the event that you cannot pay the loan back.
Your car’s condition, model and age will all play a part in determining your interest rate. Old cars tend to have higher interest rates. This is because their older age and potentially poorer condition increase the risk for the lender.
Credit Score
A high credit score signifies that you’re responsible with your finances and bill payments. As such, you’d be considered a lower-risk borrower, and lenders may be willing to offer a lower interest rate.
Experts recommend knowing your credit score before you apply for a car loan. This will give you an idea of how strong your loan application will be and the type of interest rate you may be offered. If your score is a little on the lower end, you may have time to take steps to improve your score before applying.
Down Payment
The down payment on a car loan is a percentage of the purchase price of the vehicle. Experts recommend saving for a bigger down payment for your loan. This can help you achieve a lower interest rate and reduce your car loan payments.
Some lenders may offer loans without the requirement of a down payment, but these deals usually come with higher interest rates.
Debt-To-Income Ratio
Your debt-to-income ratio refers to your recurring monthly debt payments divided by your recurring monthly income. Lenders like to look at this ratio to ensure you have enough money to pay off your new loan.
For example, if your debt takes up a high portion of your income, you’ll be seen as a high-risk borrower. If you do secure a loan, your interest payments will likely 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 like to see you know how to deal with debt.
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 manage your loan for a long period of time.
Compare Car Loan Interest Rates In Canada
| 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 |
How Do Interest Rates Affect The Cost Of My Car Loan?
To illustrate how the interest rate you’re charged affects your car loan payments, let’s use an example:
- Loan amount: $20,000
- Term length: 5 years
In this example, we’ll compare the cost of the loan with an 8% rate versus an 8.5% rate:
| 8% Interest Rate | 15% Interest Rate | |
| Monthly Payment | $405.53 | $475.80 |
| Total Interest Paid | $4,331.67 | $8,547.92 |
As you can see, interest rates have a strong effect on the total amount of money you pay for your car loan. The 15% interest rate translates to an additional $4,216.25 paid in interest compared to the 8% rate. Further, you’d be paying $70.27 more per month with the higher interest rate.
If you have low credit, a small down payment, no down payment, or a problematic employment history, you are more likely to have a car loan resembling the last column, with a higher interest rate. Your goal is to have something closer to the first column.
How Do You Get A Better Rate For A Car Loan?
Many factors 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, keeping your credit card balance less than 30% of your credit limit, and building a diverse but manageable combination of debt.
Increase Your 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. Plus, your loan payments will be higher, too.
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 you can’t afford to make a decent down payment, lenders might look for an alternative way to ensure lending to you isn’t as big a risk. One option is for you to get a co-signer for your car loan. A co-signer is someone with good credit and strong finances who will take over loan payments if you fail to do so yourself.
Having a co-signer on your loan can strengthen your application if you’re otherwise financially stable. Lenders will look at your application and consider your income and credit score as well as your co-signer’s income and credit score, increasing your chance for approval and a better interest 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, a pre-approval can 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 With The Car Dealer
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.
Can I Get 0% Financing On A Car In Canada?
You may have seen commercials promoting 0% interest on car financing deals. These types of deals are typically only offered by car dealerships, and not lenders or banks.
Getting no interest in a financing arrangement is obviously a great way to save a ton of money in interest payments. This can save you thousands of dollars over the life of your loan.
That said, there are some things you should know about 0% financing:
- 0% financing may only be available at certain dealerships and locations
- You may need a very good credit score (at least 700 or more)
- You may not be able to negotiate much on the purchase price of the vehicle
- 0% interest may only apply to part of the loan term
- Other fees may be involved, including loan origination fees and balance transfer fees.
To find the lowest interest rates on a car loan, including 0% financing, a loan search platform like Loans Canada can help connect you to lenders and car dealerships offering the best deals.
What’s The Difference Between The Interest Rate And APR?
While it’s helpful to know what the car loan interest rate is, this only gives you part of the overall picture of what your car loan will cost you. Instead, the APR — which stands for annual percentage rate — gives you a more comprehensive view of the cost of financing.
The APR is a measure of the interest rate plus any additional fees that come with the car loan. This metric tells you the actual cost of borrowing, as the interest rate alone doesn’t reflect any additional fees that the lender charges. This is why it’s important not just to look at the interest rate, as lenders may sometimes try to entice borrowers with lower interest rates, only for borrowers to discover high fees upon finalization of the loan agreement.
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.
