A Beginner’s Guide to Car Loan Interest Rates

car loan interest rates

Thinking about buying a car, but don’t have quite enough saved for a cash purchase? If so, a car loan could be the answer. A car loan can provide the money you need to buy a vehicle. The fee for borrowing the money is known as interest, and car loan interest rates are based on a percentage of the total amount borrowed.

Knowing the current and average car loan interest rate, how car loan rates work, and the factors that impact the auto loan rates you’re offered can help you choose the best car loan to meet your needs.

What is the current interest rate on a car loan?

When you’re familiar with the current car interest rates Canada offers, you’ll have a better chance of negotiating the best car finance rates when you’re ready to buy.

It can be tricky to find the current interest rates on car loans from Canada’s big five banks. Keep in mind that not all financial institutions publish their car finance rates. This is because they’re calculated based on the lender’s main or prime rate, your credit score, and the vehicle make and model.

Current Car Loan Interest Rates Canada as of May 1, 2019

  Fixed Rates Variable Rate Loan Features

undisclosed undisclosed  

4.99% – 7.99% Prime + 1.99 – 3.99% 1-8 year terms
$5,000 minimum
loan amount

6.60% – 9.65% Prime + 2.35% – 3.6% Personal loans but
can be used for
car financing

undisclosed undisclosed 1 – 7 year terms
switch from fixed
to variable rate

undisclosed undisclosed 1-8 year terms and
option to increase
payments 200%

undisclosed undisclosed Only for loans of
$7500+ and cars
up to 5 years old

And take note – if your credit is less than perfect you might get a better rate through your credit union or car dealership than through the traditional avenues at your bank.

Related: Should I Get a Car Loan Through a Bank or Dealership?

What is a Good Auto Loan Interest Rate?

Wondering if that rate your financial institution offered you is a good one? A better question is “what’s a good auto loan interest rate for me?”

The truth is that It depends on your credit rating, income, expenses, and the car you’re thinking about buying. On average though, if you’re one of the 25% of Canadians who fall into what’s known as the “sub-prime” credit category with a credit score of up to 670, the average new car loan rate is 6.39%. The average used car loan rate is 9.47%.

What about 0% car loan financing? If you have excellent credit, you just might find a 0% car loan. However, late last year CTV news reported that there are now fewer 0% loan offers than there used to be. That’s because interest rates have risen. Lenders must pay more for the money they’re borrowing, so they’re less likely to forego interest on the car loans they’re making to car buyers.

Related: Average Auto Loan Rate for Bad Credit

Which Bank has The Best Car Loan Rates?

Although financial institutions and banks might run special offers or time-limited car finance promotions, chances are, the bank with the best car loan rates isn’t offering these rates through their branches. Instead, the bank with the best car loan rates offers dealer financing through your car dealership. Here’s how it works.

If you go directly to your local bank and apply for a car loan, the loan officer gathers your financial information, checks your credit and submits a car loan application through the bank system. This is known as a direct loan.

However many banks also provide what are known as indirect car loans. They make arrangements with auto dealers to offer loans to qualified buyers right at the dealership. These indirect loans often offer lower rates to car buyers with good credit who choose to get financing through their dealership.

Car buyers simply answer a few questions and the dealer finance rep keys all the information into the system to carry out one credit request. They’ll then see which indirect bank car loans you qualify for, as well as the best rates available for you.

How Do You Beat Interest on a Car Loan?

Your best bet to beat interest on your current car loan is to make extra payments to shorten the term. The faster you pay your loan off, the less interest you’ll pay in the long run.

Looking down the road to your next car purchase, you can take action today to get a lower interest next time. Start by checking your credit report and make a plan to improve it. Make all your payments on time and in full. The longer your credit history of responsibly paying back the money you owe on credit cards, credit lines, and car loans, the more likely you’ll get offered a lower car loan rate in the future.

Related: How Does Financing a Car Work?

Do You Pay Less Interest if You Pay Off a Car Loan Early?

Yes. When you get a car loan, you get charged interest on the amount you borrowed. This could be either simple interest, where you’re charged a set percentage each year, or compound interest, where you pay additional interest on the interest which has accrued since you first took your loan.  

When you pay a car loan off early, you pay off the amount currently owed. You might also have the opportunity to make a lump sum payment towards the car loan. Even if you can’t pay it off completely, you’ll reduce the balance and pay your loan off faster.

Are Used Car Interest Rates Higher?

As surprising as it may be, used car interest rates are indeed often higher than new car loan rates in Canada. Since new cars lose value most quickly in their first few years, a used car isn’t worth as much so lenders can loan as much money towards buying them.

Also, terms for used car loans are often shorter than for new cars, so lenders don’t make as much in interest. To compensate for this, and to cover the purchase, cleaning and marketing costs of older cars, used car interest rates are usually higher than the rates for a new model of the same vehicle.

Know the basics of car loan interest rates before you go car shopping. It can help you to help plan your car purchase and make a wiser choice between your different financing options.

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