If you’re in the market for a new or used car, you’ll likely 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 8%. 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 higher or lower.
Here are the average interest rates as shown on Statistics Canada’s website:
| January 2024 | 8.24% |
| December 2023 | 8.21% |
| November 2023 | 8.33% |
| 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 |
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 Condition
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.
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 missed payments, lenders may see you as a high-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 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 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 that affects 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, 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 15.5% applied to that same loan.
| Low-Interest Rate | High-Interest Rate | |
| Loan Amount | 20,000 | 20,000 |
| Interest | 4.5% | 15.5% |
| Term Length | 4 years | 4 years |
| Monthly Payment | 456.07 | $561.70 |
| Total Amount Paid | $21,891 | $26,961 |
| Total Interest Paid | $1,891 | $6,961 |
As you can see, interest rates have a strong effect on the total amount of money you pay for your car loan. The 15.5% interest rate translates to roughly an additional $5,070 on your total price when compared to the 4.5% 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 the balance within 30% of your limit, and building a diverse but manageable combination of debt.
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 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. 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 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.
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.
