Most lenders look at a consumer’s credit score during the car loan application process. Unlike test scores, a certain credit score won’t necessarily be a pass/fail whether you get approved for an auto loan. But your credit score will influence the interest rate on financing.
The higher your credit score, the lower your interest rate will be. Finding the best interest rate is becoming important as the length of loan period continues to go up. In Canada, over 50% of all new car loans are currently financed for 84 months – seven years – or longer, according to cbc.com. Overall, a growing number of Canadian consumers are choosing to purchase vehicles with longer-term loans – sometimes buying more car than they can afford.
Especially if you’re committing to a longer repayment plan, a lower interest rate could wind up saving you thousands of dollars. Monthly savings really add up!
There are more financing options than ever – even for consumers with poor credit – but what interest rate should you get based on your score? We’re going to explore a few topics to help you make an informed decision when applying for a car loan, no matter where your credit score lands.
What type of credit is a car loan?
An auto loan is a type of instalment credit, meaning that the loan is for a defined amount of money with a set monthly or bi-weekly repayment schedule. Because the loan is a set amount of money – value of the car plus any fees – you can’t spend more the loan amount plus interest. Instalment credit is a common type of credit that includes: personal loans, student loans, auto loans, mortgages, and more.
A car is one of the largest personal assets for most Canadians and auto loans are an important part of the debt carried by households. Therefore, knowing how your credit score impacts the interest rate on your auto loan is critical.
What’s a good credit score to get a car?
Credit scores of 719 or higher for a new car, and 655 for a used car, are optimal in helping you qualify for the lowest auto loan interest rates, according to bankrate.com. For the best possible rates, super prime borrowers with a credit score of 781 or higher, will receive an average of 2.6% financing on a new car.
New vs. used car interest rates
Whether you’re looking to get behind the wheel of a new or used car, know your credit score.
Many lenders use auto-specific credit scores, so pull your credit report and compare it against what the lender has. You could potentially lower your interest rate, saving money in the long haul.
Interest rates on new car loans are lower than those for used vehicles, because lenders see newer cars as less of a risk. New cars are less likely to break down or require major repairs, and lenders can more accurately predict how much a new car will depreciate. Additionally, the resale value of new cars is easier to project, and that estimation results in lower interest rates.
According to a 2017 report from Experian, the average credit score for a new car loan was 713 and 656 for a used car loan. With extended-term loans steadily increasing – about 66 months for a used car loan – it can be costly for consumers with credit scores that put them in sub-prime and deep sub-prime interest rate categories. Statistics via experian.com
Below is a chart of the average interest rates based on credit score ranges for new and used car loans, via bankrate.com
|Credit Score Range||New Car Loan||Used Car Loan|
|Super Prime: 781 to 850||2.6 percent||3.4 percent|
|Prime: 661 to 780||3.59 percent||5.12 percent|
|Nonprime: 601 to 660||6.39 percent||9.47 percent|
|Subprime: 501 to 600||10.65 percent||15.72 percent|
|Deep Subprime: 300 to 500||13.53 percent||18.98 percent|
|Can I finance a car with a credit score of 500 or less?|
|Does a car loan build credit?|
Is a 700 credit score good for an auto loan?
A credit score in the 700s lands in the prime category and is a good score to secure a car loan. A consumer with a score of 700 is likely to receive around a 5% interest rate on a used car. In comparison, a score of 500 will land almost triple the interest rate to over 15%.
Is a credit score of 660 to 601 good enough to get an auto loan?
The 660-601 credit score range – non-prime financing – is the middle ground in terms of interest rates. In the low 600s, say a credit score of 604, you’re looking at somewhere around 6.4%. Whereas a used car loan with this same credit score hits just under 10%. From a score of 601 to 500 – non-prime to deep sub-prime – the interest rates for both new and used car loans nearly doubles!
Auto financing with a credit score under 500
With a score of 500 or less, you won’t qualify for a low interest rate, but that doesn’t mean you’re not eligible to get a car loan. This category is known as deep sub-prime, reaching interest rates of 13.53% to sometimes upwards of 20% plus. As a deep sub-prime borrower, you can expect to pay five times the rate that someone with a super-prime score of 781 or above.
According to a 2016 report from financial consumer agency of Canada (FCAC), about 25% of auto financing is non-prime lending. Although the interest rates on these loans are high, it gives opportunity to consumers with low credit – like new Canadians with little credit history, or consumers who have had credit damaged due to consumer proposal, divorce, loss of employment – to get a car they desperately need.
If you fall into the 500 or less score range, it’s helpful to bring documentation of consistent payments over the last 6 months to a year, in order to help negotiate the best interest rate possible.
How much are car payments?
The average new car loan for Canadians in 2017 was just over $30,000. With a financing over a 84 month period, it equates to around $500 in monthly car payments.
To get an estimate of what your monthly or bi-weekly car payments would be, try the RightRide Car Loan Calculator.
Does buying a car help your credit?
Yes, a car loan can indeed help improve your credit record. Just ensure you’re you’re making installments on time and in full – missed payments will damage your credit.
What some consumers have a misconception about are hard credit inquiries during the loan application process. If you stick to only a few applications in a short window of time, inquiries from lenders will have a minimal impact on your credit score.
It’s definitely beneficial for you to take on some “good debt” by getting auto financing. A car loan can benefit your credit by building a positive credit record, especially for young adults and new Canadians with little-to-no credit history. It also adds variety to your current credit mix, which accounts for 10% of your credit score. It’s a win-win situation – get the vehicle you need while also improving your credit. Moreover, having bad credit means higher car insurance rates. Even a small increase to your credit score will benefit you in multiple facets of car ownership.
While it’s possible to get a car loan with a low credit score, even a small difference in interest rate, could save you thousands of dollars over time. This is especially so given that more than half of Canadians’ loan terms are upwards of 7 years.
It could be worthwhile to spend some time working on your credit situation – especially if you fall in the deep sub-prime category – if you’re looking to get the best financing rate possible. For some helpful tips on how to build your credit, read our blog post How to improve your credit score in Canada. Also make sure to review lenders – there are a rising number of options for consumers with a range of credit scores. So shop around a bit. Consider your financing options and lenders’ terms as in-depth as you would the make, model, and features of your future car.
In closing, super-prime borrowers – consumers with a credit score of 781 or higher – will receive the best interest rates. However, it’s always beneficial to explore all options – including in-house dealership financing – available to you. There are also ways to offset your poor credit, like putting a down payment on your loan or getting a cosignor. If you’re ready to find the right new or pre-owned vehicle for you, apply online with RightRide.