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Getting a Lower Car Loan Interest Rates

Getting a Lower Car Loan Interest Rates

When financing a car purchase, the interest rate you receive can have a major impact on your total costs. It’s important to understand what goes into determining your rate.

Several key factors influence the APR (annual percentage rate) you’ll be offered on a car loan:


  • Credit score – Borrowers with higher scores typically qualify for lower rates
  • Down payment amount – More money down reduces risk for the lender
  • Loan term – Shorter loans tend to have lower interest rates
  • Type of vehicle – New cars often have better financing offers

Your credit score is one of the biggest considerations. Currently, the average used car loan interest rate is around 5.5% for borrowers with good credit (scores above 690). For those with lower scores, rates can be over 20%.

The APR shows the total cost of a loan including interest and fees. A 5% interest rate with 2% in fees would have a 7% APR. Comparing APRs helps you understand the true cost of financing.

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Check Your Credit Report and Score

Your credit score is one of the biggest factors lenders use to determine your interest rate, so improving it can lead to big savings. Here’s what you need to know about credit reports and scores when applying for an auto loan:


Why Credit Scores Matter for Interest Rates

Lenders view borrowers with higher credit scores as less risky, since their credit history shows responsible management of debts and payments. As a result, consumers with excellent credit in the 720+ range typically qualify for the very best interest rates on car loans, often under 3%.

As scores decline, interest rates go up. Subprime borrowers with scores under 620 may pay 10-20% or even higher. Improving your credit score by just a few points can save thousands in interest charges.


How to Get Free Credit Reports

You can access free copies of your credit reports from the three major bureaus (Equifax, Experian, TransUnion) each year at Checking reports from all three is essential, since they may contain different information that impacts your scores.

Review your reports closely to spot any negative items or errors dragging your score down. Getting mistakes corrected can give your score an easy boost before applying for an auto loan.


How to Check Credit Scores

Many credit cards and banks allow you to check credit scores for free. You can also use sites like and, which provide free estimates of your scores and credit factors.

Purchase official FICO scores from for the most accurate snapshot of your credit standing.


How to Improve Credit Scores

Some tips for improving credit scores include:


  • Pay all bills on time
  • Pay down balances on credit cards and loans
  • Avoid new credit inquiries in the months before applying for a car loan
  • Have long credit histories and mix of credit types
  • Correct any errors on your credit reports


With diligent credit management, you can raise your scores significantly in under a year. The savings in lower interest costs make it well worth the effort.


Calculate How Much You Can Afford

Before shopping for a car loan, it’s important to carefully calculate how much you can realistically afford. This involves determining your monthly budget for a car payment, factoring in any down payment savings you may have, and using those numbers to calculate the loan amount and terms you can take on. Setting realistic expectations for interest rates based on your credit and finances is also key.

Start by looking at your monthly income and expenses and deciding the maximum you can budget towards a car payment. Generally, this car payment budget should be no more than 10-15% of your take home pay. Next, factor in any down payment funds you have saved – usually 10-20% of the vehicle price. The more you can put down, the lower the loan amount will be.

Use an auto loan calculator to determine loan amounts and terms you can afford based on the monthly budget and down payment. For example, with a $300 monthly budget and $2,000 down payment, you may be able to afford a $10,000 loan at 5% APR for 48 months. Play with the numbers to find options that fit your situation.

Finally, check your credit score and set realistic expectations for interest rates you may qualify for. Those with scores above 740 often get the best rates, while lower scores lead to higher APRs. Going in with reasonable rate expectations helps when negotiating loans.

Doing the math ahead of time on monthly budgets, down payments, and affordable loan terms lets you shop for optimal auto financing you can truly handle.


Increase Your Down Payment

Putting more money down upfront when purchasing a vehicle can significantly reduce the interest rate lenders offer you. Here’s how a larger down payment benefits you:


  • Shows lenders you are financially committed to the loan
  • Lowers the amount borrowed so less interest accrues over time
  • Reduces monthly payments, making the loan more affordable
  • Allows qualification for better interest rates from lenders


Most lenders prefer a down payment of at least 10-20% of the vehicle’s purchase price. Putting down more than that amount gives you even better rates.

Here are some tips for saving up a larger down payment before getting an auto loan:


  • Build up emergency savings over several months dedicated just for the down payment
  • Cut back discretionary spending to put more money aside each month
  • Sell unused household items, electronics, or other valuables you no longer need
  • Temporarily take on a second job or side gig to earn extra income


With some diligent saving, you can boost your down payment and qualify for the lowest interest rates possible from lenders and dealerships.


Choose a Shorter Loan Term

One of the most effective ways to reduce the total interest paid on a car loan is to choose a shorter repayment term. Auto loans typically come in terms ranging from 12 months to 84 months (7 years).

The interest rate on a shorter term is usually lower because the lender’s money is at risk for a shorter period of time. For example, a 36-month loan may have a 3% rate while a 60-month loan has a 5% rate from the same lender.

Shorter loans also mean you pay off the balance quicker, so less interest has time to accrue. Even a small rate difference can add up to thousands in savings over the life of the loan.

Consider a $25,000 loan at 3% for 3 years versus 5% for 5 years:


  • 3 year term: $26,153 total paid including $1,153 in interest
  • 5 year term: $28,809 total paid including $3,809 in interest


That’s a savings of $2,656 just by shortening the length of the loan. Of course, the monthly payments are higher, so make sure you can afford the larger payment before committing.

As a rule of thumb, choose the shortest term where the payments are still within your budget. This lowers the total interest paid and helps you pay off the loan faster.


Prequalify with Multiple Lenders

One of the best ways to get the lowest interest rate on your next car loan is to shop around and compare offers from multiple lenders. Here are some of the main options to explore:


Banks and Credit Unions

Local banks and credit unions are a great place to start your search. Since they want your business, many will offer very competitive rates, especially if you have an existing relationship and accounts with them. Getting preapproved for financing from banks and credit unions locks in an interest rate you can then use as leverage when shopping for a car.


Online Lenders

Online lenders like LendingTree, Lightstream, and Bankrate have made it easy to compare auto loan offers entirely online. They provide fast rate quotes you can use to negotiate with other lenders and dealers. Online lenders cater to a national market, so they actively compete to offer low rates to win your business.


Lock In the Lowest Rate

After getting prequalified offers from several sources, compare all the interest rates side-by-side. Then move forward with the lender providing the lowest APR. Having a preapproval letter locks in the interest rate, protects your bargaining position, and speeds up the final loan process.


Consider Refinancing Your Current Auto Loan

If you already have an existing car loan, refinancing the loan with another lender could potentially help you secure a lower interest rate. This involves taking out a new loan to pay off your current financing. Refinancing makes the most sense if:


  • Your credit score has improved significantly since you got your original loan
  • Interest rates have dropped and you can now qualify for a much lower APR
  • Your financial situation has changed and you now qualify for better loan terms


You can explore refinancing offers from banks, credit unions, online lenders, and your own auto insurance or financial institutions. To determine if refinancing could save you money, calculate your potential interest savings:


  • Figure out your remaining loan balance and how many payments are left
  • Determine what new interest rate you could qualify for through refinancing
  • Use an auto loan calculator to estimate your new monthly payment
  • Compare to your existing payment and loan terms


If you can get over 1-2% lower APR and have at least 12 months left on your loan, refinancing could pay off in interest savings fairly quickly. Just be sure to account for any fees from the new lender when running the numbers.


Negotiate the Interest Rate with the Dealer

One effective strategy is to negotiate the interest rate directly with the dealership’s financing department. This leverages the prequalification offers you’ve already received from other lenders.

Going into discussions armed with better rate quotes gives you more bargaining power. Make it clear you’re comparing lenders and terms and are prepared to walk away if the dealer can’t match or beat the APR you’ve been offered elsewhere.

Many dealers work with multiple banks and lenders and have some leeway to adjust rates. They want to close sales, so may compromise, especially if you have attractive offers in hand.

Get financing quotes from other dealers too. Let each know you’re shopping rates and see if they’ll compete to earn your business. Making dealers bid to offer the lowest rate can result in significant savings.

But avoid sharing specific rate details, which reduces their incentive to beat rather than just match other offers. Be ready to make your best deal across multiple dealerships if needed.


Make Payments on Time

One of the best ways to keep your auto loan interest rate low is to make your monthly payments on time. Paying late, or missing payments altogether, will damage your credit and cause your interest rate to go up. Here are some tips for maintaining an on-time payment history:


Benefits of perfect payment history

Making every car payment on time has several advantages:


  • It prevents late fees and penalties from being added to your loan balance.
  • Your credit score won’t take a hit, which keeps you eligible for better interest rates.
  • You’ll pay off the loan faster by avoiding extra interest charges.
  • Future lenders will see your perfect track record, making you look like a very low-risk borrower.


Set up autopay to avoid missed payments

Autopay is a convenient option that deducts your monthly payment automatically from your bank account. This prevents you from forgetting a payment or having checks get lost in the mail. Just be sure you have enough in your account each month to cover the payment amount.


Pay online or by phone for convenience

Most lenders allow you to pay by phone or on their website. Setting a reminder in your calendar and then making payments online can ensure they arrive on time every month.


Make Extra Payments When Possible

One of the most effective ways to reduce your interest costs and pay off your auto loan faster is to make extra payments whenever you can. Even small additional amounts go directly to reducing your principal balance, which then lowers the total interest you pay over the life of the loan.

There are two main options for making extra payments:


Adding Extra to Monthly Payments

See if your lender allows you to pay a little extra each month. Even an extra $20 or $50 per month can make a significant difference over several years. This builds up your equity faster. Auto loans that amortize calculate your payment to pay interest first before principal. So extra funds go straight to principal.


Making an Extra Lump Sum Payment

When you receive a tax refund, bonus, or other windfall, consider making a larger one-time extra payment. This immediately cuts down a bigger chunk of your balance. Some lenders let you specify it goes directly to principal. Recalculating your payoff schedule will show you how much time or interest you can save.

Just be sure there are no prepayment penalties. And don’t skip a regular payment after making an extra payment. Maintaining your monthly minimum keeps everything on track.


Recalculating Interest Savings with Early Payoff

Plugging a few scenarios into an online auto loan calculator shows the dramatic savings from extra payments. For example, a $25,000 loan at 4% over 5 years costs $1,228 in interest if paid as scheduled. But just adding $100 a month saves $714 in interest and pays it off almost 2 years early. Even bigger extras speed up payoff further.

Every extra dollar toward principal now rather than interest saves you money. Accelerating your auto loan payoff reduces interest charges so more of your money goes where you want – towards owning your car sooner.


Refinance Your Existing Loan

If you already have an auto loan, refinancing can potentially help you secure a lower interest rate and reduce your monthly payments. Refinancing makes the most sense when:


  • Interest rates have dropped significantly since you took out your original loan
  • Your credit score has improved, qualifying you for better rates
  • You want to change the length of your loan term


To find the best refinancing offers, check with your current lender as well as other banks, credit unions, and online lenders. Compare their rates and run the numbers to see how much you can save.

When calculating potential interest savings, look at:


  • The lower interest rate and corresponding monthly payments
  • Any fees to process the new loan
  • The number of months left on your current loan term


In many cases, you can save thousands of dollars in interest charges over the life of the loan by refinancing. Just be sure the savings outweigh any upfront costs.


Sell Your Car and Buy Another

Selling your current vehicle and using the proceeds to buy another one can be an effective strategy for lowering your interest rate and monthly payment. Here are some key points on how trading in or selling privately can potentially improve your loan terms:


Use Sales Proceeds as Down Payment on New Car

Putting more money down on your next vehicle purchase reduces the amount you need to finance. This larger down payment signals less risk for the lender, meaning they may offer a lower interest rate. Using the proceeds from selling your old car can give you a nice chunk to put down.


Qualify for Better Loan Terms on Different Car

The type of vehicle you buy also impacts available financing offers. Older used cars tend to have higher interest rates, while brand new models often come with current low APR promotions from manufacturers. So trading in your current ride for a different one could open up better loan terms.


Trading In vs Private Party Sale

You’ll generally get more money selling privately rather than trading in your car. However, the convenience and speed of trading it to a dealership may allow you to seamlessly roll proceeds into the next purchase. Run the numbers to see if the trade-in value outweighs the hassle of selling yourself.


Explore Lease Options

Leasing a car is another way to get lower monthly payments compared to financing a purchase. With a lease, you essentially rent the vehicle for a set number of months or miles. At the end of the lease, you return the car instead of owning it.

Leases offer lower monthly payments because you’re only paying for the vehicle’s depreciation during the term, plus rent charges and interest. You aren’t financing the entire purchase price. However, leases also have some downsides:


  • Mileage limits – Most leases limit the number of miles you can drive, typically 10,000-15,000 per year. Exceeding those limits leads to costly overage fees.
  • Wear-and-tear – You may face charges for any damage or excess wear when returning the leased vehicle.
  • No equity – With leasing, you don’t build any equity in the vehicle like you would when financing a purchase.


Overall, leasing lets you drive a newer car for less money each month compared to financing the same vehicle. But the mileage limits and lack of ownership are significant drawbacks to factor in.


Maintain Good Credit Habits

One of the best ways to qualify for lower interest rates is to have a strong credit profile. Lenders view borrowers with higher credit scores as less risky, so they will offer better rates. Here are some tips for keeping your credit score in good shape:


Keep credit utilization low

Credit utilization is the percentage of your total available credit that you are using at any given time. Experts recommend keeping this below 30%. Maxing out cards or having high balances can drag down your score.


Avoid applying for new credit before loans

Each credit application causes a small, temporary hit to your credit. Limit new inquiries in the months preceding your auto loan application. Too many can indicate higher risk to lenders.


Correct errors on credit report

Check all three major credit reports for mistakes that could be damaging your score. Dispute any inaccurate information with the bureaus to get it corrected or removed. This can give your score a nice boost before applying.


Compare Rates Frequently

One of the best ongoing strategies for getting a lower interest rate on your auto loan is to compare rates frequently. Here are some tips on how to leverage rate shopping over time:

Shop rates every few months or when your credit score changes. Even after you’ve financed your car, it pays to check back with lenders periodically to see if you now qualify for better interest rates. This is especially true if your credit score has increased significantly.

Consider refinancing if better rates are found. If you find a much lower rate from another lender, run the numbers to see if refinancing makes sense. Calculate potential interest savings against any fees to refinance. Refinancing can lower your rate and payments.

Negotiate with your current lender for a better rate. Many lenders are willing to adjust rates for existing customers if their credit profile has improved. It doesn’t hurt to ask your financing institution if they’ll reduce your rate based on your now higher credit score.

Staying on top of current market rates and having periodic conversations with lenders can help you steadily lower your interest charges over the life of your car loan.


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Questions About Getting a Lower Car Loan Interest Rates

You have a few options to get a lower interest rate on your car loan in Canada. The most impactful steps are to improve your credit score, shop around with multiple lenders, opt for a shorter loan term, and make a larger down payment. You may also be able to negotiate your interest rate directly with the lender. Consider going through a credit union as they frequently offer lower rates than banks or dealerships.

To get the very best interest rates in Canada, you’ll generally need a credit score of at least 720. Here’s a rough guide to the auto loan interest rates you can expect with different credit scores:


– Score Below 600: 8-15%

– Score 600-679: 5-8%

– Score 680-719: 3-5%

– Score 720+: 0-3%


As your score rises, more lenders will compete for your business with better rate offers. Monitoring your credit report and maintaining responsible credit habits over time are key to maximize your score.

It’s common for interest rate offers to vary by 2% or more between different banks and lenders in Canada. This means shopping around can make a significant difference. For a $25,000 auto loan over 5 years, 2% less interest saves you about $1000 overall. Comparing rates from multiple sources like banks, dealerships, and credit unions will help ensure you get the best deal.

Yes, getting pre-approved before visiting dealerships can improve your negotiating position in Canada. Pre-approval locks in an interest rate you qualify for. That gives you leverage to negotiate for an even lower rate directly with the dealer, rather than accept whatever they offer first. With a pre-approved rate in hand, they know you have attractive financing options and they may work harder to beat the rate you’ve already been offered.

The longer your loan term, the lower your monthly payment will be. But longer loans also pay significantly more interest over time. Most experts recommend limiting your car loan term to a maximum of 5 or 6 years. Going longer than that increases total interest paid by too much. A good benchmark is that your loan term shouldn’t exceed the useful lifespan of the vehicle itself.

Financing less money generally means you can qualify for a lower interest rate in Canada. That’s because lenders view smaller loans as less risky. Putting at least a 20% down payment shows the lender you’re financially committed and gets you the best rates. But even just scaling back your loan amount somewhat via a 10-15% down payment can help improve your interest rate versus 0% down.

It depends. Longer loan terms do enable lower monthly payments. But they cost more overall in interest charges. A good benchmark most experts recommend is keeping your loan term to no more than 5-6 years. Loans longer than that cost substantially more in interest with little benefit. A longer term also increases the risk of becoming “upside down” on your loan.

Here are some of the most effective ways to reduce interest costs on a car loan in Canada:


– Improve your credit score

– Shop rates from at least 3 lenders

– Put 20% or more down

– Choose a 36 or 48 month loan term

– Buy a cheaper car

– Make extra payments to pay it off faster


Every little bit helps when trying to get the lowest rate and pay the least interest!

It depends on your credit and the actual interest rates offered. Dealers sometimes offer very low special rates to qualified buyers as incentives. But those advertised rates usually require top tier credit. For most buyers, independent financing from a bank, credit union, or online lender actually offers lower interest rates on average.

The most affordable auto loans typically come from credit unions. Their rates average about 2% lower versus the major banks. Online lenders also tend to offer very competitive interest rates. Wherever you finance, having top tier credit in the 720+ range will qualify you for the lowest interest rates on a car loan in Canada.

Used car loan rates are generally 0.5 to 2% higher than new vehicle loan rates, depending on your credit. Here are the average used car loan interest rates in Canada currently across various credit tiers:


– Score Below 600: 9-15%

– Score 600-679: 6-9%

– Score 680-719: 4-6%

– Score 720+: 2-4%


So make sure to factor about 2% higher interest into your budget if you plan to finance a used vehicle. Improving your credit score can offset much of this increase.

Several banks advertise rates around 4-5% for used cars with good credit. But in reality, the major banks rarely offer the rock bottom lowest loan rates. The most affordable used car loan financing typically comes from online lenders and credit unions instead. They often beat even the best bank rates by 1-2% or more.

This strategy can backfire. Yes, some lenders offer better rates for longer term loans, even with similar credit scores. But those long loans can really ramp up your total interest costs over time. It’s generally better to accept a slightly higher rate on a shorter 3-5 year loan rather than get a lower rate but pay interest for 6-8 years.

Those with poor credit still have options for financing, but should expect higher interest rates. Some sources to check for bad credit auto loans in Canada include:


– National subprime lenders like CarFinanceCorp

– Specific dealerships that offer special bad credit financing programs

– Major banks via secured loan products requiring collateral

– Borrowing from family and friends instead


Shopping rates from multiple subprime lenders is important to minimize interest costs. Expect rates of 8-15% or higher depending on your exact credit score.

Paying “points” allows you to buy down your interest rate by paying a fee upfront. This can make sense in certain situations – like if better credit means you qualify for much lower rates. Crunch the numbers carefully. Calculate your breakeven point where paying points saves more money over the loan term than they cost. But don’t pay points solely based on promised savings from the lender. Verify the math yourself to validate the decision.

Read the fine print carefully when reviewing auto loan offers. Watch out for clauses that let your interest rate rise over time. Loans with variable rates that change with market conditions are also riskier. And watch out for loans with prepayment penalties locking you in over the full term. Avoid potential pitfalls like this by clearly understanding the loan details before signing.

If the initial rate offered seems too high, politely ask if they can do any better. Be ready to walk out if needed to bring more negotiation leverage. Mentioning lower rate offers you’ve received from other lenders can also prompt dealers to revisit their rate and terms to win your business. Having good credit gives you the most flexibility to negotiate the interest rate down.

If you didn’t get the best rate when you originally financed your car, refinancing can definitely save you money. To make it worthwhile, you’ll want to reduce your interest rate by at least 2%. Refinancing also resets the clock on your loan term. Just make sure to avoid extending the length of the loan too far out from your original maturity date when you refi.

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