When financing a new or used car, getting a good car loan interest rate is important for saving money. In Canada, car loan rates can range from 0% to as much as 36%, but the 0% usually applies to new cars. The starting APR (annual percentage rate charged for borrowing) is typically around 5%.
It’s important to do your research before you start your car search. Read on to learn why rates matter, how rates vary by lender, what factors can influence your rate and how you can improve your odds on getting the best car loan interest rates.
Why interest rates matter?
Whether you’re getting a used car or a new one, your interest rate is important. It determines how much your car loan costs over the long-term.
Say you’re getting a $25,000 car loan with a five-year repayment term. Your interest rate is 6.5 per cent, your monthly payment is $489 and your total interest paid on the loan is $4,349.
Now say your interest rate is 5.5 per cent. Your monthly payment would only drop to $478 but your 5.5 per cent interest rate reduces the interest paid to $3,652. That 1 per cent decrease on your interest rate amounts to about $700 in savings.
What it comes down to is this: the better your interest rate, the more money you can save. It’ll also give you a lower monthly payment which can help your budget.
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How interest rates vary by lender
Where you decide to get financing can impact the rates you’ll pay for a car loan.
Your options include:
Bank loans. Banks are favourable for individuals who have great credit scores. You could be eligible for 0% financing through your bank.
Credit union loans. Credit unions (and banks) can provide reasonable rates on car loans for newcomers to Canada who may have a limited Canadian credit history.
Online auto lenders. Online lenders may offer 0% financing but you’re more likely to pay higher rates if you have less than perfect credit. Online lenders can offer car loan rates up to 30% or higher for borrowers who have poor (or no) credit history.
Dealership financing. Rates at dealerships mostly depend on the dealer. If a dealership works with an outside bank, your interest rate may be higher than what you might pay at a bank, credit union or online lender.
At Birchwood Credit, we do credit finance differently—we lend our own money. This means quicker approval, better repayment terms and better rates for you, even if you don’t have a perfect credit score. While banks or other lenders may deny you solely based on your credit score, we look at your entire financial situation and help you get the best rate available.
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What factors influence car loan rates?
There are several things lenders look at when deciding car loan interest rates:
- Your credit score and credit history
- Your income and where it comes from
- Employment history
- Vehicle age
- Vehicle value
- Loan term length
- Down payment amount (if any)
These factors all have the potential to affect your interest rate. So does The Bank of Canada’s interest rate policy—if interest rates are rising, you could expect to pay a higher rate for a car loan. Conversely, when rates are lowered, car loan rates may drop as well.
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How to improve your odds of getting the best rate
If you’re planning to finance a new or used car in the near future, here are a few things you can do to increase your chances of getting a great interest rate:
- Work on improving your credit. If you have bad credit, make sure you’re paying bills on time, keeping your credit card balance low and avoid applying for new credit. Taking these small steps can help improve your credit score.
- Increase your down payment. Putting more money down on a car means you have to finance less. When you have a smaller loan, it can help you get a lower interest rate when you borrow.
- Work with the right lender. At Birchwood Credit, bad credit isn’t a barrier to getting vehicle financing. We understand your situation is unique to you and we’ll work with you to find a payment plan that fits your needs.