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Written by Kayla Jane Barrie Updated on Feb 25, 2025 6 mins read

Blog Car Loan Interest Rates in Canada

Car loan interest rates explained

Purchasing a car is a significant financial commitment, and for many Ontarians, getting a car loan is essential. It's crucial to understand car loan interest rates to make sure you are making well-informed financial decisions.

Before signing any documents, it’s advisable to learn how interest rates function in relation to auto loans. For example, while choosing a longer loan term with lower interest rates may help keep your monthly payments manageable, it could cost you more money in the long run compared to other loan options. It's important to assess what isthe most suitable option. To make that determination, it's essential to have a solid grasp of how interest rates on how car loans operate.

This blog post will explore the primary factors influencing car loan interest rates in Ontario. We’ll help you understand the complexities and make the best choice based on your financial situation.

Three takeaways about interest rates on car loans

  • A car loan interest rate is the percentage that a lender (bank or dealership) charges a borrower (you) for using its money to purchase a vehicle.
  • Interest rates are decided by economic factors, your credit score, down payment, term length, promotional offers, and vehicle type.
  • You have options. Shop around and compare car loan options to find the most affordable one.

What is a car loan interest rate?

A car loan interest rate is the percentage that a lender charges for a car loan. It is calculated based on the loan amount and paid monthly along with the principal. This rate is commonly expressed as an annual percentage rate (APR) and can significantly affect the total cost of the loan.

Car loans usually have fixed interest rates, meaning the rate remains constant throughout the loan term. However, some loans may have variable rates that change over time based on market conditions.

Understanding car loan interest rates is important for making well-informed financial decisions when buying a vehicle. To secure the best possible rate, compare offers from different lenders and consider your financial situation.

What determines the interest rate for a car?

The interest rate for a car loan is determined by several factors, which can vary between lenders. Here are the primary factors:

  • Credit score rating: One of the most significant factors is the credit score of borrowers. Those with higher credit scores typically receive lower interest rates because they are viewed as less risky. Lenders assess your creditworthiness based on your credit history and score.
  • Loan term length: The length of the loan term affects the interest rate, with shorter-term loans generally having lower interest rates compared to longer-term loans. However, longer terms result in lower monthly payments, which may be more appealing to some borrowers.
  • Down payment amount: A larger down payment reduces the amount financed and may qualify you for a lower interest rate. It shows the lender that you have a significant investment in the vehicle, reducing their risk.
  • Type of vehicle: The interest rate may vary depending on whether the vehicle is new or used. Loans for new cars typically have lower interest rates than loans for used cars because new cars are considered less risky in terms of depreciation and maintenance.
  • The lender: Different lenders offer varying rates based on their policies, risk assessments, and current market conditions. Banks, credit unions, and online lenders may have different rates for the same borrower.
  • Economic conditions: The overall economic environment can impact interest rates. Economic stability and growth may lead to lower rates, while downturns may cause rates to rise to compensate for increased risk.
  • Loan-to-value ratio (LTV): Compares the loan amount to the car's value. A lower LTV, achieved by a higher down payment or a lower loan amount, can result in a lower interest rate.
  • Promotions: Sometimes, dealerships or manufacturers offer promotional interest rates on certain models or during specific times of the year.

Understanding these factors can help you better prepare when applying for a car loan and potentially secure a more favourable interest rate.

Factors that impact car loan interest rates in Canada

Various factors impact interest rates on car loans. Here’s a look at them:

  • Credit score: Borrowers with higher credit scores typically qualify for lower interest rates because they are perceived as less risky.
  • Loan term: Shorter loan terms often come with lower interest rates, while longer terms might have higher rates.
  • Down payment: A larger down payment can reduce the loan amount and potentially lower the interest rate.
  • Lenders: Different lenders offer different rates based on their policies and the borrower's creditworthiness.
  • New vs. used cars: Loans for new cars typically have lower interest rates compared to loans for used cars.
  • Calculating interest: Interest on a car loan can be calculated using different methods, such as simple interest or compound interest. Most car loans use simple interest, which is calculated on the principal amount of the loan.
  • Monthly payments: The monthly payment amount is directly affected by the interest rate, with higher rates leading to increased monthly payments and more interest over the loan's life.

How are car loan interest rates calculated?

Car loan interest rates are calculated based on several key factors, and understanding the calculation method can help you make informed decisions. Here’s an overview of how car loan interest rates are typically calculated:

To manually figure out your monthly car loan payment, you need to divide the total amount of the loan plus the interest by the loan term (the number of months you have to repay the loan).

For instance, the total interest on a $25,000 loan over 48 months at 5% interest would be $2,500. Therefore, your monthly payment would be $572.92 ($25,000 + $2,500 ÷ 48 = $572.92).

The longer your repayment period, the more interest you will accumulate overall—and typically, your interest rate will be higher. If possible, make a down payment and aim for the shortest loan term you can manage with a monthly payment that fits your budget.

Here are some additional things to keep in mind in regard to calculating loan rates:

  • Prepayment penalties: Some loans may impose a fee if you pay off the loan early.
  • Additional fees: Take note of any extra charges that could raise the total cost of the loan.
  • Variable vs. fixed: Understand whether your interest rate is fixed (remains constant throughout the loan term) or variable (can change based on market conditions).

Remember, owning a car includes additional costs beyond the loan payment. Ensure you have enough funds for Ontario car insurance, fuel, parking, maintenance, and other related expenses.

car key being transfered over to a person

Does my credit score impact car loan interest rates in Canada?

Yes, your credit score significantly impacts car loan interest rates in Canada. Here’s how:

Lenders use your credit score to assess your creditworthiness. 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. Conversely, a lower credit score suggests higher risk, leading lenders to charge higher interest rates to compensate for the potential risk.

Here’s a general 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, often in the 3-5% range.
  • Good (700-749): Borrowers with good credit scores can still secure relatively low interest rates, though slightly higher than those with excellent credit, usually around 5-7%.
  • Fair (650-699): Borrowers in this range may see higher interest rates, typically around 7-10%, as lenders view them as moderately risky.
  • Poor (600-649): Interest rates for borrowers with poor credit can be quite high, often in the range of 10-15%.
  • Very Poor (below 600): Borrowers with very poor credit scores may face interest rates above 15% or struggle to secure financing from traditional lenders. They might need to seek out specialized lenders who cater to high-risk borrowers.

In addition to the credit score, lenders in Canada consider several other factors when determining interest rates for car loans:

  • Credit history: Length of credit history, types of credit accounts, and history of payments.
  • Income: Steady and sufficient income can positively influence the interest rate.
  • Debt-to-income ratio: Lower ratios can lead to better interest rates.
  • Down payment: Larger down payments can reduce the loan amount and may result in lower interest.

Just as when searching for car insurance, it's beneficial to compare offers from different lenders. Each lender may evaluate your credit score and other factors differently, resulting in varying interest rate offers.

What is a good interest rate on a car loan?

According to StatsCan, interest rates for a car loan fall between 5% and 9% as of March 2024. In Canada, a good interest rate for a car loan is around the current national average car loan rate of 8.09%. These numbers can be higher or lower depending on dealership offers, your credit score, and other variables.

For new cars, interest rates typically range from 0% to 7.5% for those with good credit. Used car loan rates are usually higher, falling between 8% and 10%, while bad credit auto loan rates range from 14% to 29.99% due to the increased risk for lenders.

When determining the interest rate on an auto loan, lenders consider the prime rate fluctuations as well as the borrower’s credit score, loan term, loan amount, and the competitive landscape.

Note: These rates may be different from when the blog was originally written. Check with your financial advisor about current market trends to see the current interest rates.

Find an affordable insurance rate to pair with your car loan

While you're looking for the best car loan rate, use Thinkinsure to shop around online and compare multiple car insurance quotes.

Red car driving on country road

Car loan interest rate FAQs

On average, new cars typically have lower interest rates than used cars. This is because lenders view used cars as riskier due to their age, mileage, and condition. When buying a used car, interest rates can vary based on whether they are subvented, meaning they are lower than the posted bank rate, which allows you to pay less interest over the period of your car loan. It's important to note that you usually need a great credit score to qualify for it. Additionally, certified pre-owned vehicles may qualify for special financing rates from specific manufacturers.

Dealerships typically have a minimum credit score requirement to secure a loan and generally fall within the range of 550-600, but it can vary depending on the specific dealership. It's important to understand that meeting the credit score requirement does not guarantee approval of your loan. It's also worth noting that the higher your credit score, the better loan terms you may be offered.

You can find the latest loan interest rates for cars in Canada by visiting banks, lenders, the Bank of Canada, and dealerships.

Always browse your options for a car loan

When securing a car loan in Ontario, it's important to understand the various factors that can influence interest rates and take proactive steps to secure the best deal. You can confidently navigate the car financing process by improving your credit score, shopping around, and carefully reviewing loan terms.

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Tags Buy and Sell Vehicles

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