With inflation rates declining, car loan interest rates are being affected. Keep reading to learn how interest rates are calculated, how changes in inflation impact car loan rates and what this all means if you are looking to purchase a vehicle in the near future.
HOW ARE CAR LOAN RATES CALCULATED IN CANADA?
In Canada, car loan rates are calculated using a lender’s prime rate, which is a rate adjusted by the Bank of Canada based on changes in the economy and monetary policy.
When the prime rate increases, lenders increase car loan rates to ensure they can still make a profit. When the prime rate goes down, lenders lower their auto financing rates to remain competitive and continue attracting borrowers.
WHAT IS THE AVERAGE CAR LOAN RATE IN CANADA?
According to Statistics Canada, the average car loan interest rate in Canada is currently 7.77%.
The average car loan interest rate has increased 4.03 percentage points in 8 years (from 2016 to 2024). You may remember the rates dropping in 2020, but they rose sharply again in 2022 after the Bank of Canada introduced new rate hikes.
WHAT IS A GOOD CAR LOAN RATE IN CANADA?
A good interest rate on a car loan in Canada is one that is equal to or near the current national average car loan rate of 7.77%.
While fluctuations in the prime rate will always influence the interest rate on an auto loan, lenders also use a variety of other factors to set their interest rates including:
•Borrower’s credit score and history
•Borrower’s income
•Borrower’s debt-to-income ratio
•Type of vehicle
•Loan term
•Loan amount
•Down payment
•Current competitive landscape
ARE CAR LOAN RATES GOING DOWN IN 2024?
It’s hard to say. Some experts say yes, while others say it’s unlikely.
The rate for the rest of 2024 is uncertain because we don’t know if the Bank of Canada will choose to cut, hike or hold its rate for the remainder of the year – but rest assured, if the Bank of Canada does decide to cut rates, you can expect car loan interest rates to decrease as well!
DOES MY CREDIT SCORE AFFECT CAR LOAN INTEREST RATES?
Yes, your credit score can significantly impact car loan interest rates when purchasing a vehicle because lenders use your credit score to assess your creditworthiness.
This means a higher credit score indicates that you are a reliable borrower who is likely to repay the loan on time, lowering the lender’s risk. A lower credit score suggests higher risk, leading lenders to charge higher interest rates to compensate for the potential risk.
Here’s a breakdown of how different credit score ranges can impact car loan interest rates:
•Excellent (750-900): Borrowers with excellent credit scores are likely to qualify for the lowest interest rates available (3-5% range).
•Good (700-749): Borrowers with good credit scores can often still secure lower interest rates (5-7% range).
•Fair (650-699): Borrowers in this range may see higher interest rates, as lenders view them as moderately risky (7-10% range).
•Poor (600-649): Interest rates for borrowers with poor credit can be quite high (10-15% range).
•Very Poor (below 600): Borrowers with very poor credit scores may struggle to secure financing from traditional lenders or they may face extremely high interest rates (15%+).
WHERE CAN I FIND THE BEST THE BEST CAR LOAN RATES IN CANADA?
•Online Loan Search Platforms: CarsFast and Loans Canada are partnered with Canadian dealers and lenders to match you up with car loans. Even if your credit score isn’t great, you can apply – but be prepared for higher interest rates.
•Banks & Credit Unions: Another option is to head straight to a bank or credit union for a car loan. While financial institutions do not have an incentive to sell you a car, they may still be able to offer you competitive interest rates.
•Dealerships: Dealerships are partnered with banks and other lenders to help you find the best rate. Some even offer their own in-house financing (like we do here at Birchwood Credit), which can offer more payment flexibility, faster approvals and personalized service.
TIPS TO GETTING THE BEST CAR LOAN INTEREST RATE
Be prepared to do some research and lender comparing in order to find the best rates in Canada. These quick tips can help you find a low interest rate on your next car loan and save you thousands of dollars in the long run.
Know where your credit stands. Before you shop, it’s important to understand your credit score and how it impacts your finances. For example, if you have a history of missed payments, your application will look less favourable to lenders. You can get a copy of your credit report from credit reporting agencies or use our Secure Credit Check here.
Compare rates and lenders. Some lenders allow you to get pre-approved without impacting your credit, so you know what rates you’re eligible for ahead of time. This makes it easier to compare rates and find a loan that’s suitable for you. Just be aware that some lenders will do a hard credit check (which will affect your credit score), so always ask ahead of time.
Get pre-approved. When you compare your options, you’ll have an idea of the rates you’re eligible for and you’ll have a solid number to negotiate a lower interest rate when you visit a dealership that offers financing. At Birchwood Credit, you can fill out our easy online form and be approved within 24 hours.
Don’t jump on the first deal. It can be tempting to take the first good interest rate that comes your way, but stay patient. Since your interest rate isn’t the only thing that impacts the final price of your car, spend time determining how term length and vehicle costs will affect the overall total. Try out our Car Loan Calculator to help determine your budget.
Read the fine print. Car loan contracts are notorious for having complicated terminology. Make sure you read the fine print around how how interest is calculated and any potential fees you might have to pay. You’ll also want to confirm that your loan isn’t conditional, meaning your terms could change later on.
READY TO BUY?
We understand you may have less-than-perfect credit for reasons beyond your control, which can greatly affect the car loan interest rates you are offered.
We also believe that people deserve to get a car loan, no matter what their financial history looks like. We have the experience and resources to help with all the following types of credit situations:
• Bad credit/no credit
• First-time car loan applicants
• Getting a car loan after bankruptcy
• Slow, late or missed payment history
• New to Canada
• Low income
• And more
Here at Birchwood Credit, we’ll not only help you drive away in a car you love, but we can give you guidance on how to rebuild your credit for a brighter financial future. Don’t let any credit concerns stop you from getting your next vehicle – apply for a loan today!
