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Cost Of Borrowing in Car Loans

Cost Of Borrowing in Car Loans

Buying a new or used car is an exciting milestone that comes with a lot of important financial decisions. One of the biggest is determining whether to pay cash upfront or finance your vehicle purchase through an auto loan. While getting approved for financing allows you to drive the car home right away in exchange for affordable monthly payments, it also means you’ll end up paying extra costs in interest and fees over the full loan term.

Before signing on the dotted line, it’s essential to understand exactly what goes into the true cost of borrowing money to buy a car. The total expenses include more than just the negotiated vehicle price. Interest rates, loan length, fees and additional charges can add thousands to the overall price tag. Being aware of how each factor impacts the bottom line allows you to make an informed decision on financing your next car.

In this comprehensive guide, we’ll explore the key elements that determine the cost of an auto loan. You’ll discover how interest rates, loan terms, fees and other costs contribute to the total borrowing expense. We’ll also look at tools to accurately estimate your complete loan costs and provide tips to save money. With all this information, you’ll be able to confidently weigh the overall price tag of financing versus paying cash when purchasing your next vehicle.

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How Interest Rates Impact the Cost to Finance a Car

The interest rate has the biggest influence on your overall cost to borrow money to buy a car. Rates typically range from 3% to over 20% depending on your:


  • Credit score
  • Income
  • Down payment
  • Loan term


On a $30,000 5-year loan, the difference between 3% and 8% interest means paying either $1,714 or $5,111 in total interest. Checking rates from multiple lenders ensures you get the best deal.


How Loan Terms Change the Total Interest Paid

Longer loan terms come with lower monthly payments, but increase the total interest paid over the life of the loan.

For example, on a $30,000 auto loan at 6% interest:


  • 5-year term: $618 monthly payment, $5,227 total interest
  • 6-year term: $530 monthly payment, $6,358 total interest


While that extra year decreases your monthly payment by $88, you end up paying an additional $1,131 in interest charges. This highlights the tradeoff between short-term savings on monthly payments and higher long-term borrowing costs when extending your loan term.

Carefully consider whether lower monthly payments now truly justify paying thousands more in interest over the full repayment period. Keep the loan term as short as comfortably fits your budget to minimize the total cost of financing your vehicle purchase.


Fees that Add to the Cost of an Auto Loan

Along with interest, fees that get rolled into the loan amount also raise the cost of borrowing. These include:



A $500 origination fee on a $30,000 loan adds $1,668 in interest at 6% over 5 years. Origination fees compensate the lender for processing and underwriting the loan. Documentation fees cover preparing the loan contract and related paperwork.

Title and registration fees pay for transferring ownership and registering the vehicle with the local DMV. Extended warranty costs get bundled into the loan even though they provide no value to the lender.

Shop multiple lenders and negotiate fees where possible. Ask the lender to waive or reduce fees that seem excessive. Consider paying some fees upfront instead of financing them to reduce borrowing costs. Minimizing fees helps lower the overall cost of your auto loan.


Calculating the Total Cost to Borrow Money for a Car

To determine the complete cost of an auto loan, you need to calculate the total amount you will pay over the full loan term. This includes the original loan principal, all interest charges, and any fees or additional costs. The formula to calculate total cost is:


Total Cost = Loan Amount + Interest + Fees

For example, on a $30,000 loan at 6% interest over 5 years with a $500 origination fee, the math would be:


Loan Amount: $30,000

Interest: $5,111 (based on loan calculator)

Fee: $500

Total Cost: $30,000 + $5,111 + $500 = $35,611


Calculating the all-in cost to borrow money for a car allows you to clearly compare financing offers. You can see whether lower interest rates justify higher fees, or if a longer loan term with a lower payment outweighs the increased interest charges.


Use an Auto Loan Calculator for Accurate Estimates

Online auto loan calculators make it easy to estimate your monthly payments and total borrowing costs under different scenarios. With an auto loan calculator, you can customize details like:


  • Loan amount
  • Interest rate
  • Loan term
  • Down payment
  • Fees


By inputting your actual credit score, the calculator can factor in rates you’re likely to qualify for based on your creditworthiness. This results in a realistic estimate of what your monthly payment would be on a given auto loan.

The power of an auto loan calculator comes from being able to adjust the variables to reveal how each factor impacts your bottom line. For example, you can see how increasing your down payment lowers the monthly payment. Or how a longer loan term reduces the payment but increases the total interest paid over time.

Running different scenarios allows you to find the optimal balance of down payment, loan term, and interest rate for your budget. Be sure to use a reputable auto loan calculator from a major financial institution to get the most accurate estimates.


Should I Pay Cash or Finance My Next Car?

If you can swing it, paying cash typically saves thousands in interest costs. But you also lose out on any investment returns that money could’ve earned elsewhere.

Paying cash avoids financing charges, but has an opportunity cost if that money could be invested for higher returns instead. Here are the main considerations when deciding whether to pay cash or finance:


  • Interest rate on auto loan vs. expected investment returns
  • Your personal cash flow and budget
  • Whether you already have an emergency fund
  • Your credit score and loan terms/fees available
  • Tax implications of interest payments


In general, if you can get approved for a low interest rate under 5%, investing extra cash may make more sense than paying for the car in full. But rates over 10% likely justify paying cash to avoid excessive interest fees.

Consider all your financial options and use this guide to make sure you understand the true cost of borrowing money before committing to your next auto loan.


APR Definition

APR stands for Annual Percentage Rate and represents the true annual cost of borrowing for an auto loan. It includes not just the interest rate, but also any fees, charges, or additional costs that get financed as part of the loan.

While interest rates give you a sense of the cost to borrow money, APR provides a more complete picture. It captures fees like origination fees, documentation fees, extended warranty costs, or any other charges that raise the overall loan amount.

Since APR factors in all costs, it allows you to accurately compare loans between different lenders. One lender may offer a lower interest rate but charge higher fees. Another may have a higher interest rate but less fees. Looking only at interest rates could be misleading – APR gives you the real total annual cost of each loan.

The higher the APR, the more expensive it is to borrow money for your vehicle purchase over time. Carefully comparing APRs ensures you get the most affordable overall auto financing.


Average Monthly Payment

Your monthly car payment depends primarily on the amount you are borrowing to finance the vehicle. Auto loans cover both the loan principal, which is the original purchase price, as well as interest charges on the borrowed funds.

The average monthly car payment in Canada is between $450-$650 for new vehicles and $350-$550 for used vehicles. Of course, the exact amount depends on factors like:


  • Loan amount – The more expensive the vehicle, the higher the monthly payments
  • Down payment – Larger down payments reduce the amount borrowed, lowering payments
  • Interest rate – Rates typically range from 3-20%, directly impacting the monthly cost
  • Loan term – Longer terms of 6-8 years mean lower payments but greater overall interest
  • Credit score – Better credit means qualifying for lower rates, reducing monthly costs


Use an auto loan calculator to estimate your personalized monthly payment amount based on these key financing factors. This allows you to set a realistic monthly auto finance budget before heading to the dealership.


72-84 Month Loans

Many lenders today offer auto loans with terms up to 84 months, or 7 years. The advantage of these extended loans is the lower monthly payment. Borrowing $30,000 over 84 months at 6% interest would be around $465 per month.

The downside is that the longer loan period results in paying significantly more interest over the life of the loan. That $30,000 loan would incur $5,111 in interest over 5 years, but $7,674 over 7 years – an extra $2,563.

Extending your loan term only makes sense if:


  • You need the lower monthly payment to afford the vehicle
  • You have excellent credit to qualify for the lowest rates
  • You plan to pay off the loan early


Otherwise, a longer auto loan could cost you thousands in unnecessary interest charges. Carefully consider whether the lower monthly payment now is worth the higher long-term costs.


Mistakes to Avoid When Borrowing to Buy a Car

When shopping for an auto loan, it’s easy to get caught up in the excitement of a new vehicle and make mistakes that end up costing you more. Avoid these common pitfalls that can increase your total cost of borrowing:


Not Considering Total Costs

It’s tempting to only look at the monthly payment when taking out a car loan. But the total interest paid over the full loan term often ends up being thousands of dollars. Run the numbers on the overall cost, not just the monthly price tag.


Overlooking Fees

Lenders can tack on all kinds of fees to your auto loan including origination fees, documentation fees, extended warranty costs and more. Make sure to factor these into your total cost calculations.


Focusing Only on Monthly Payment

A longer loan term reduces your monthly payment, but increases the total interest you pay over time. Don’t let lower monthly costs today distract you from how much extra you’re spending overall.


Leasing vs Financing: Key Differences

When deciding whether to finance or lease a new vehicle, it’s important to understand that leasing doesn’t include the full vehicle purchase price like an auto loan does.

With a lease, you only pay for the vehicle’s depreciation during the lease term plus some fees and interest. You make lower monthly payments compared to financing since you’re not borrowing the entire car price.

For example, leasing a $40,000 vehicle with $10,000 down over 3 years may have monthly payments around $250. Financing the full $40,000 over 5 years with $10,000 down would be closer to $500 per month.

Leasing is typically the better option if:


  • You want lower monthly payments
  • Plan to drive less than 15,000 km per year
  • Like to swap cars frequently every 2-3 years
  • Want a newer car with the latest features
  • Don’t intend to keep the vehicle long-term


However, leasing comes with restrictions on mileage, wear and tear, and at the end you have nothing to show for all those payments. Financing results in eventually owning the vehicle outright after all payments are made.

Carefully compare the pros and cons before deciding to lease or finance your next new car.



When deciding whether to pay cash or finance your next vehicle purchase, carefully consider the key factors that impact the overall cost of borrowing money:


  • Interest rate – The single biggest factor. Shop around for the lowest rate you qualify for.
  • Loan term – Longer terms mean more interest paid over time.
  • Fees – Negotiate to minimize or remove fees where possible.


To reduce the price of financing, aim for the shortest term you can afford, the lowest rate based on your credit, and minimal fees. Avoid extending your loan past 60 months if possible.

An auto loan calculator gives you an accurate picture of how rate, term, fees, and other inputs affect the total cost of borrowing. Use it to model different scenarios.

If you have the cash available, paying outright in cash typically saves substantially on interest costs. But also consider potential returns if investing that money elsewhere.

Carefully weighing all your options allows you to make the most informed decision on paying cash vs. taking out a loan for your next car.

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Questions About The Cost Of Borrowing

The cost of borrowing to finance a car purchase in Canada includes interest charges plus any loan fees or additional costs. Interest rates can vary widely based on your credit score, loan term, down payment amount, and other factors. Expect to pay anywhere from 3-15% in annual interest depending on these variables. The total cost of borrowing is the sum of all interest payments plus fees over the full loan term.

Your monthly car loan payment in Canada is calculated based on the vehicle purchase price, interest rate, loan term length, down payment amount, taxes, and any fees. The formula is:


Monthly Payment = [Loan Amount x Interest Rate x (1 + Interest Rate)^Term] / [(1 + Interest Rate)^Term – 1]


For example, borrowing $25,000 at 5% interest for 5 years with a $5,000 down payment would equal a monthly payment of around $475.

A good interest rate for a car loan in Canada today is generally between 3-7% for borrowers with good or excellent credit scores. The higher your credit score, the better rate you can qualify for from most lenders. Anything under 5% is considered an excellent rate right now. Older used cars may have slightly higher rates closer to 8-12%.

To get the very best car loan interest rates in Canada, you typically need a minimum credit score of 720 or higher. This is considered excellent credit. Scores between 680-719 are still good and can qualify for competitive rates under 10% in most cases. If your score is under 640, it becomes much harder to get approved for a car loan at all.

It’s generally not recommended to take much longer than a 5 year loan term even if it lowers your payment. Longer terms of 6-8 years have much higher total interest costs over time. Aim for the shortest term you can afford each month to save significantly on interest expenses. The one exception would be 0% financing deals which have no interest costs.

Some common fees to watch out for with Canadian car loans include documentation or administrative fees, early payout penalties if you pay off the loan early, default or late fees if you miss payments, lien registration fees, and prepayment penalties. Ask lenders to detail all fees upfront.

If you can pay cash for a used car and avoid financing costs it usually makes the most financial sense, but depends on factors like the interest rate you could earn on those savings vs. car loan rates. Weigh paying investment earnings vs. loan interest. Financing used cars at low rates can be reasonable too but avoid high interest loans.

Most experts recommend at least a 20% down payment when financing a car to get better rates and show commitment to paying off the loan. Putting less than 20% down leads to higher interest rates in most cases. Anything lower than 10% down and rates get quite expensive. Save up an appropriate down payment before buying.

Leasing a new car usually makes more sense than financing from a cash flow perspective since monthly payments are lower, but leasing rarely adds up as the cheapest option long-term. Buying and financing a car you drive for many years usually costs less overall than perpetual leasing. Do the math on both options.

The pros of 0% car financing deals are no interest charges, often combined with other incentives like cash rebates. The cons are that you often can’t combine 0% offers with other deals, they may require large down payments, have short loan terms, and charge fees. Read all fine print carefully before choosing a 0% option.

When applying for car loan financing, most Canada lenders require your driver’s license, proof of insurance, proof of income through recent pay stubs or tax documents, a bill demonstrating your current address, references, and permission to run a credit check. Some may ask for more.

Simply applying for a car loan and having the lender run your credit will result in a small temporary drop in your Canadian credit score – but if approved and you make timely payments it will actually build your score over the long run. Applying at multiple places leads to bigger score impacts.

With online auto financing applications becoming more common getting approved for a car loan in Canada can take anywhere from 1 hour up to 1-2 days in most cases. Physical applications at banks or dealers may take 1-5 business days to get a loan decision. Having pre-approval can speed up the buying process.

The best rates on car loans typically come from online lenders, credit unions, and major banks like RBC, TD, Scotiabank, CIBC, and BMO. Compare rates from multiple competing lenders, evaluate incentives, and negotiate the best rate possible. Look for pre-approval promotions.

It’s best to check rates from both banks/credit unions and dealerships when financing a car purchase in Canada. Dealers often offer manufacturer incentives but have fewer loan options. Banks usually have very competitive pre-set rates depending on credit factors. Apply in both places.

Those with bad credit do have some high-interest subprime lending options for buying cars in Canada – expect rates over 10% and strict loan requirements. Other options include applying with a co-signer who has better credit or looking at alternative financing groups that focus on rebuilding credit like Spring Financial.

Getting pre-approved for an auto loan in Canada sets up a pre-set maximum loan amount and rate that locks you into a monthly payment range. This gives you negotiating leverage when shopping for cars, ensures loan funding at purchase, and speeds up the dealer buying process by weeks or even months.


Most all banks and lenders in Canada are currently offering auto loan/lease deferrals up to 90 days for those facing financial hardship due to COVID-19. This allows one to delay making payments temporarily. Check with your lender regarding deferral eligibility during this crisis.


The best sites for researching new car prices, rebates, discounts and special offers in Canada include,, and discounts from the manufacturer websites. You can save thousands off MSRP by using these services and shopping competitively.

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