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A new or used car in Canada costs $61,000 and $39,000, respectively. Having that kind of cash lying around is highly unlikely for most car shoppers, so they rely on auto loans. With these car loans come interest rates — the cost the lender charges you for borrowing the money.
When buying a new or used car, the car loan interest rate is something you should closely consider, as this can significantly increase the ownership costs throughout the loan. To help you better understand this complex topic, we'll look closer at car loan interest rates in Canada, what affects them, and how you can secure the lowest interest rate possible.
Car Loan Interest Rates Explained
Car loan interest rates are an important part of purchasing a car. It’s the percentage of the remaining loan amount you'll pay throughout your loan term as a fee to the lender. So, your car loan interest rate will directly impact the amount of money you'll pay the lender on top of the original amount borrowed.
Interest rates can come in two flavours: fixed and variable.
Fixed interest rates are most common in auto loans and are popular because they remain the same throughout the loan term. This keeps all your monthly payments predictable, so you can maintain a consistent budget. The only downside to fixed-rate loans is they may initially be higher than variable interest rates. This may lead to higher interest payments over the entire loan term.
Variable interest rates fluctuate with market rates. If the market rates go up, your interest rate will also increase, resulting in higher monthly payments. If the rates fall, your car loan payments may also decrease. These fluctuating payments may make it difficult to budget for your car payments. However, the one positive is that variable interest rates may initially be lower than fixed interest rates, leaving you to pay less interest throughout the loan.
Shopping around for car loans and comparing interest rates from different lenders is an important step in your car-shopping process. This will help you find the best interest rate for your financial situation and potentially save you money in the long run.
When considering car loan interest rates, it's important to account for any additional fees or charges associated with the loan. These may include origination fees, prepayment penalties, electronic payment fees, or other fees that could add to the overall cost of the loan.
Factors that Affect Car Loan Interest Rates in Canada
A range of factors can impact your car loan interest rates. Some factors are within your control, but others are outside your control. The factors that can impact your car loan interest rate include:
- Credit score and credit history
- Loan term
- Loan amount
- Down payment amount
- Type of car (new or used)
- Vehicle age and condition
- Current market rates
These factors can affect the car loan interest rate lenders will offer you. Generally speaking, the better your credit score and credit history and the larger your down payment, the lower your interest rate will be. Also, a shorter loan term and a newer vehicle will also often come with lower interest rates.
A new car usually has a lower interest rate than a used car, and a certified pre-owned (CPO) vehicle may have lower rates than your normal used car. The difference is, though, you’ll pay a premium for a new or CPO vehicle, which offsets much of the savings from a lower interest rate.
How to Secure the Lowest Interest Rate on a Car Loan
Getting the lowest possible car loan interest rates should be one of your top car-shopping goals. These tips will help you secure the best interest rate possible.
1. Improve Your Credit Score and Credit History
Before applying for a loan, improve your credit history and score by paying off any outstanding debts or accounts and making all your payments on time. With less debt, lenders may see you as a lower risk and offer lower interest rates in return.
2. Save More Toward a Down Payment
With a larger down payment, the lender is giving you less cash to buy the vehicle and you’re reducing its negative equity. This help lowers the lender’s risk, which can help reduce your interest rate.
3. Opt for a Shorter Loan Term
The less time the lender has to wait to collect its money from you, the lower the risk you’ll default on the loan. A shorter loan term often translates into big car loan interest rate savings. Yes, your monthly payments will be higher as you shorten the term, but you’ll see a higher portion of your payments going toward the principal balance instead of interest charges.
4. Find a Newer, Lower-Mileage Vehicle
Shopping around and comparing rates from different lenders can also help you find the best deal. Be sure to look not only at interest rates but also at any additional fees or charges associated with the loan.
Opting for a new car will often net you the best interest rate overall — especially considering many automakers offer special financing from their captive financing arms. However, with higher initial prices and steeper depreciation than used cars, a new car is not always a good financial decision.
However, if you focus on low-mileage, late-model used cars, you can get lower interest rates than older vehicles with higher mileage. Why’s that? Again, it all comes down to risk. With a high-mileage, older vehicle, the lender is risking the vehicle breaking down and you not being able to afford your monthly payment. So, with the higher risk comes a higher interest rate.
Average New Car Loan Interest Rate
Buying a new vehicle is exciting and scary at the same time. The interest rate is a huge factor to consider when financing your new car. According to recent data, the average interest rate for a new car loan in Canada is 6.07%. But remember that this rate can vary depending on the loan provider, your credit score, and other factors.
With a good credit score, you may score rates as low as 0 to 3%. On the other hand, if you have poor credit, you may pay upwards of 10 to 15% in interest.
Average Used Car Loan Interest Rate
Buying a used car can save thousands on the initial cost, but the interest rate is generally higher than a new car. According to recent data, the average used car loan interest rate is 10.26%.
Used vehicles have higher interest rates because the lender’s risk is higher than with a new car purchase. Used cars may have more wear and tear, potentially leading to unexpected repairs and maintenance costs. Plus, older cars may lack advanced safety features or technology, making them a riskier investment for lenders.
Like new cars, used car financing interest rates vary greatly by the lender, your credit score and history, and other factors. So, with great credit and the right used car, you could easily get single-digit interest rates. Conversely, with bad credit, you can have an even higher interest rate. Make sure to shop around to find the best interest rate before settling on a lender.
Can I Lower the Interest Rate on My Current Car Loan?
If you already have a car loan, and see the interest rates are now lower or you’ve improved your credit rating and want a lower rate, you’re likely wondering if you’re locked into your current rate. You can reduce the interest you pay over time by changing your payment amounts or outright lower your interest rate through refinancing.
If you want to save on interest charges overall, you can periodically make extra payments toward your loan's principal balance. This will reduce your principal balance quicker, resulting in lower interest charges, though your interest rate will remain the same.
If you want to actually reduce your interest rate, you must take a different route because, unlike credit cards, you’re locked into your auto loan rate in almost every case. You can contact your lender to ask if you can get a reduced rate, but they will likely advise you the only way to do so is to refinance your auto loan.
Refinancing your loan takes out a new loan for the remaining balance on your old loan and pays it off. The typical goal of refinancing is to get a lower interest rate on the new loan. That said, some people refinance to opt into a longer term and lower their payments or to remove someone from a loan, like a co-signer or an ex-spouse.
How to Refinance a Car Loan in Canada
You may want to consider refinancing if you have a car loan with high interest rates or unfavourable terms.
You can refinance with your existing or a new lender, but we suggest shopping multiple lenders to get the best rate. To refinance your car loan in Canada, obtain your car loan details and the current payoff balance, then contact several lenders.
You’ll go through the loan application process for each lender, and they will return with your new loan terms. Make sure to carefully read and understand the terms of your new loan before signing anything.
Refinancing can be tricky, as you may see the monthly payment fall and assume it’s due to a low interest rate. In reality, though, the lender could give you the same rate and just extend the terms, putting you in the same or worse position in terms of total interest paid.
Get a Quality Used Car and Financing at Clutch
Tired of shopping around for a quality used car and great car loan rates in Canada? Clutch can help with both. First, we have a huge inventory of quality used cars ready for you. How do you know our used cars are top-notch? Because they’ve all been through a rigorous 210-point inspection and reconditioning process and include a 90-day or 6,000-km warranty,
On top of that, we also include a 10-day or 750-km test-own period. If you don’t love your Clutch vehicle in that period, you can return it for a full refund or exchange it for a different vehicle.
We also offer financing options that, like our used-car buying process, are completed 100% online. Simply fill out our online credit application, and we’ll get all the loan terms to you quickly. We also take in trades; you can get a firm offer on your trade-in vehicle 100% online.
Check out Clutch’s full inventory of quality use vehicles and complete your purchase 100% online — no need to set foot in a car dealership.
