Car Deal Canada

Car Loan Interest Calculation

Car Loan Interest Calculation

Buying a new or used car is one of the biggest purchases most people will make. With the average price of a new vehicle now over $47,000 in Canada, securing auto financing is a must for the majority of car shoppers.

But rushing into a car loan without fully grasping how interest works can end up costing you thousands over the life of the loan. It pays to understand the basics of calculating interest before signing on the dotted line.

This comprehensive guide will walk you through everything you need to know. You’ll learn:


  • What interest on a car loan really means
  • The difference between simple and compound interest
  • Formulas and examples for calculating both types of interest
  • How to estimate your total interest costs
  • Factors that impact loan interest rates
  • Tools and resources to simplify interest calculations
  • Case studies for different loan amounts
  • How to potentially lower interest costs


Understanding these key concepts will ensure you go into the car buying process informed, empowered, and ready to find the best possible auto financing.

Get Pre-Qualified in Under 60 Seconds

All Credit Approved and 0 Money Down Options Available


What is Interest on a Car Loan?

When you take out a loan to purchase a vehicle, the interest is an additional charge the lender applies on top of the principal amount borrowed. The principal is the actual amount of money you receive to buy the car. Interest is the cost of borrowing that money.

Interest is usually expressed as an annual percentage rate (APR) that’s charged over the full term of the auto loan. APR factors in the base interest rate plus any additional loan fees or costs. It provides a standardized way to compare interest rates across different loans and lenders.

Interest is how lending institutions like banks and credit unions earn revenue for financing auto purchases. So when you take out a car loan, you’ll repay not just the original principal, but extra in interest charges over time. The total interest cost depends on factors like the loan amount, APR, and length of the loan term.


How Interest Rates Are Determined

When you apply for an auto loan, lenders will look at several factors to determine the interest rate they will offer you. The most important factor is your credit score. Borrowers with excellent credit scores above 760 typically qualify for the lowest rates, while those with poor credit below 620 pay the highest interest rates.

Other factors lenders consider include the loan term, amount financed, and current market interest rates. Longer loan terms generally have higher interest rates. Larger loans also tend to have slightly higher rates. And when market rates overall are low, auto loan rates will be lower compared to when market rates are higher.

Currently, average new car loan interest rates are around 4.5% for buyers with great credit. For used cars, average rates are closer to 7%. Here are some common auto loan rate ranges based on credit scores:


  • 760+ credit score: 3.5% – 5%
  • 700-759 credit score: 4.5% – 7%
  • 640-699 credit score: 6% – 9%
  • 620-639 credit score: 8% – 12%
  • Below 620 credit score: 10% – 20%


Shopping around and comparing loan offers from multiple lenders can help you find the best rates for your situation. Be sure to get pre-qualified first so you know your credit score interest rate range.


Simple vs. Compound Interest

When taking out a car loan, there are two main ways interest can be calculated: simple interest or compound interest.

With simple interest loans, the interest charge is based only on the original principal amount borrowed. The interest accrues but does not compound on a simple interest loan. Here is the formula used to calculate simple interest each month:

Monthly interest = Remaining principal balance x (Interest rate ÷ 12)

For example, if you take out a $15,000 car loan at 5% APR over 5 years, in the first month the interest would be:

$15,000 x (0.05 ÷ 12) = $62.50

The interest payment would be $62.50 for each of the 60 monthly payments. Your total interest paid over the life of this simple interest loan would be $3,750.

Compound interest loans charge interest on both the original principal borrowed and any accumulated interest. Compound interest loans have higher total interest costs because the interest compounds and builds upon itself each period. Here’s the formula used to calculate compound interest:


A = P(1 + r/n)^(nt)


A = Total amount to repay

P = Initial principal balance

r = Interest rate

n = Number of compound periods per year

t = Number of years


Using the same $15,000 loan amount at 5% interest compounded monthly for 5 years, the total repayment with compound interest would be $17,332.25.

The pros of simple interest loans are the interest calculations are straightforward and the total interest costs are lower. The cons are that you cannot take advantage of the benefits of compounding interest if you make extra principal payments to pay off your loan faster.

Compound interest loans have higher total interest costs but give borrowers the advantage of interest building on interest if additional payments are made. This allows you to pay off the loan faster by applying early payments mostly to principal.

Overall, simple interest loans tend to be better for borrowers while compound interest favors the lender but gives the borrower more control over the lifetime interest costs.


Calculating Simple Interest

With a simple interest auto loan, the interest is calculated only on the outstanding principal balance. Here is the formula to determine your monthly simple interest payment:


Monthly Interest = Remaining Principal Balance x (Interest Rate ÷ 12)

Let’s walk through some examples to see how this formula works in real loan scenarios.


Loan Amount

Interest Rate

Monthly Interest



$10,000 x (0.05 / 12) = $41.67



$20,000 x (0.04 / 12) = $66.67



$30,000 x (0.06 / 12) = $150


As you can see, the higher the loan amount and interest rate, the greater the monthly interest payment will be. This table gives you a sense of how the numbers change based on your specific auto loan details.

With a simple interest loan, every month your monthly principal payment reduces the outstanding balance. This in turn lowers your interest obligation over the lifetime of the loan. This differs from compound interest loans, where interest builds on itself, as we’ll discuss next.


Calculating Compound Interest

With compound interest loans, the interest accrues on both the original principal amount borrowed and any accumulated interest from previous periods. Compound interest calculations take into account that interest builds on itself over time. Here is the formula used:

A = P(1 + r/n)nt


  • A = Total amount to repay
  • P = Initial principal balance
  • r = Interest rate
  • n = Number of compound periods per year
  • t = Number of years


Let’s walk through some examples to see how the math works.

For a $20,000 auto loan at 4% interest compounded monthly for 5 years, the calculation would be:

A = $20,000(1 + 0.04/12)(12*5) = $22,032.63

For a $15,000 loan at 6% interest compounded daily for 3 years, it would be:

A = $15,000(1 + 0.06/365)(365*3) = $17,315.30

Here’s a summary of the compound interest totals compared to simple interest on the same loan amounts:


Loan Details

Simple Interest

Compound Interest

$20,000 at 4% for 5 years



$15,000 at 6% for 3 years




As shown, the compound interest method results in a higher total repayment amount due to interest building on itself over time.


Estimated Total Interest Cost

One of the most important things to calculate when taking out a car loan is the total interest you will pay over the life of the loan. This gives you the full picture of how much borrowing the money will truly cost you.

To find your total interest cost, simply subtract the loan principal (amount borrowed) from the total payments you’ll make over the loan term. Here is the formula:


Total Interest = Total Payments – Principal Amount


For example, if you take out a $15,000 car loan at 5% interest for 5 years, your monthly payment would be around $287. Your total payments over the 5 year term equal $17,220. Using the formula:


Total Interest = $17,220 – $15,000 = $2,220


In this case the total interest works out to $2,220 over the life of the loan.

As another example, say you get a $25,000 car loan at 4% interest over 6 years. Your monthly payment would be about $420, with total payments of $30,240. The interest cost is:


Total Interest = $30,240 – $25,000 = $5,240


Taking the time to calculate total interest helps you see the true long-term cost of any car loan and make sure you get the most affordable financing.


Other Costs to Factor In

When budgeting for a car purchase, interest is a big expense but not the only one. Here are some other costs that factor into your total loan amount and payments:


Taxes and Fees

Sales tax, documentation fees, and other charges are added to the purchase price when you finance. This increases the principal you borrow and the interest you pay. Even a few hundred dollars of fees can add up with interest over the years.



Lenders require you carry comprehensive and collision coverage. Insurance premiums add to your overall cost and monthly payment. With a larger loan amount, you may pay higher insurance rates.


Down Payment

A larger down payment reduces the amount you have to borrow, lowering the interest fees. Putting 10-20% down can save thousands in interest charges over the loan term.



Getting value for your trade-in lowers the total you finance. Negative equity from an existing loan rolls into the new loan and increases interest costs. Paying off your old car first helps maximize interest savings.

Looking at all these factors provides a full picture of how much a car really costs including interest. It helps you make an informed decision when shopping for financing.


Shopping with Loan Interest in Mind

When it comes to getting the best interest rate on your auto loan, there are several strategies you can employ:

Improve your credit score. Lenders offer lower interest rates to borrowers with excellent credit, typically 740 or higher. Paying down debts, making payments on time, and limiting credit inquiries can help boost your score before applying.

Make a larger down payment. Putting 10-20% or more down shows lenders you’re financially committed. A bigger down payment also lowers the amount you have to borrow and your loan-to-value ratio.

Opt for a shorter loan term. Stretching out loan repayment over 6-7 years may seem tempting, but longer terms mean paying more interest over time. A 3-5 year term will have lower rates.

Compare offers from multiple lenders. With online lending marketplaces, it’s easier than ever to compare loan offers. Apply with several banks, credit unions, and auto lenders to find the best rates for which you qualify.

Negotiate the purchase price and interest rate. Especially on used cars, don’t be afraid to counter the dealer’s initial offer and ask them to beat the interest rate your bank gave you. Lowering the sale price also lowers the amount you need to finance.

By using these tips to secure the most favorable loan terms, you can save significantly on interest charges over the life of your car loan.


Loan Amount Case Studies

To better understand how interest can add up with different loan amounts, let’s walk through some examples. We’ll look at loan interest costs for three common auto loan amounts – $15,000, $20,000 and $30,000. For each we’ll calculate simple and compound interest over a 5 year term to compare.


$15,000 Auto Loan

For a $15,000 auto loan at 5% APR:

Simple interest: $15,000 x (0.05 ÷ 12) x 60 months = $3,750 total interest

Compound interest: $15,000 x (1 + 0.05/12)^(12 x 5) = $4,332.25 total interest

With simple interest the total interest paid is $3,750. Compound interest raises the total interest costs to $4,332.25.


$20,000 Auto Loan

Now let’s look at a $20,000 loan amount:

Simple interest: $20,000 x (0.05 ÷ 12) x 60 months = $5,000 total interest

Compound interest: $20,000 x (1 + 0.05/12)^(12 x 5) = $5,776.33 total interest

Again we see compound interest adds quite a bit to the total interest paid – $5,776.33 vs. $5,000 for simple interest.


$30,000 Auto Loan

Finally, with a $30,000 initial principal:

Simple interest: $30,000 x (0.05 ÷ 12) x 60 months = $7,500 total interest

Compound interest: $30,000 x (1 + 0.05/12)^(12 x 5) = $8,664.50 total interest

On a $30,000 loan the difference is even larger – $8,664.50 in compound interest compared to $7,500 with simple interest.

As you can see from these examples, the loan amount makes a significant difference in the total interest paid over the life of an auto loan. Compound interest leads to especially high interest costs on larger loans.


New vs Used Car Loan Interest Rates

When it comes to auto loans, interest rates are often higher for used cars compared to new. According to Experian’s State of the Automotive Finance Market report, in the fourth quarter of 2022 the average interest rate was 5.14% for new cars and 8.61% for used.

There are a few key reasons used car loans tend to have higher interest rates:


  • Higher risk – Lenders view used cars as riskier collateral since they have unknown maintenance histories and a greater chance of requiring repairs.
  • Shorter loan terms – Used car loans are typically for shorter periods of time, like 36-60 months. The shorter timeframe results in higher monthly payments and APRs.
  • Lower amounts financed – Used cars have lower purchase prices, so the absolute interest earned is less. Lenders charge higher rates to compensate.


If your credit is good, here are some tips to get better interest rates on a used car loan:


  • Shop around – Compare rates from banks, credit unions, and dealers to find the best APR.
  • Ask about promotions – Some lenders offer periodic rate discounts for used car loans.
  • Opt for longer terms – Extending your loan length to 72-84 months can lower your monthly payment and rate.
  • Make a larger down payment – A 20% or higher down payment signals less risk to the lender.


Running the numbers and negotiating with lenders can help you secure the most favourable used car financing terms.


Refinancing to Lower Interest Rates

If you already have an existing car loan, refinancing the loan can potentially help you save money by getting a lower interest rate. Refinancing makes the most sense when interest rates have dropped significantly since you first got your loan.

To calculate if refinancing could save you money, start by looking up current interest rates from lenders. Then use an auto loan calculator to estimate your new monthly payment based on the current rates and your remaining loan balance and term.

Compare your new estimated payment to your current one to see how much you might save per month and over the total loan term by refinancing. Keep in mind you may have to pay closing costs on a refinance loan.

The best places to find current refinancing offers are your existing lender, banks and credit unions, and online lenders that specialize in auto loan refinancing. Be sure to compare all the terms and rates to find the best overall deal.

Refinancing can potentially save you hundreds or even thousands of dollars in interest costs. Calculate the numbers to see if it makes sense for your situation.


Alternatives to Car Loans

While financing is the most common way to pay for a vehicle, it’s not the only option. Here are some alternatives to traditional auto loans worth considering:


Buying with Cash

Paying cash upfront means you won’t pay any interest or finance charges. You’ll also have the freedom to negotiate a lower purchase price without financing terms complicating the deal. On the downside, few people can afford to pay for a car fully in cash. Saving up could delay your purchase for years. You also miss out on the opportunity cost of investing your money elsewhere while enjoying a depreciating asset like a car.



With a lease, you only pay for the vehicle’s depreciation during your lease term, plus rent charges, fees, and taxes. Monthly payments are usually lower than financing the same vehicle. However, you must hand the car back at lease end unless you purchase it outright. Leasing makes the most sense for people who want a new car every few years.


Dealer Financing vs Bank/Credit Union Loans

Dealers often offer promotional financing rates to move inventory. But banks and credit unions may offer better ongoing rates. Shop around for pre-approval so you can negotiate the best terms. Credit unions usually offer the most competitive rates due to their member-ownership structure.

Weighing all your options will help determine the most strategic financing method or alternative to paying for your next car.



When it comes to buying a car, understanding how interest works is critical to determining the true long-term costs of any auto loan. By taking the time to calculate interest using the simple or compound formula, you’ll be better informed when comparing loan terms and rates.

In this guide, we covered the basics of interest, how it’s calculated with simple or compounding methods, and tips for estimating your total interest costs. Knowing the formulas empowers you to compare scenarios and make sure you get the lowest rate possible.

Refinancing and shopping around between lenders can help minimize interest expenses. Opting for a shorter loan term or making extra principal payments are other ways to reduce total interest costs over the life of your loan.

While interest is just one piece of the auto financing puzzle, taking the time to understand and calculate it will ensure you don’t overpay. Arm yourself with knowledge, run the numbers yourself, and enjoy your new vehicle with confidence in the deal you’ve secured.

Get Approved Today

See if you qualify in under 60 seconds

Questions About Calculating Car Loan Interest

To calculate the interest rate on your car loan in Canada, first divide your stated Annual Percentage Rate (APR) by 12 to get your monthly interest rate. Then, multiply your monthly payment amount by the number of months left on your loan term. Finally, divide this total interest amount by the remaining loan balance to get your actual monthly interest rate.


The formula is:


**(APR/12) x Remaining Loan Term x Monthly Payment / Remaining Loan Balance = Actual Monthly Interest Rate**


For example, if you have a $20,000 car loan at 5% APR over 5 years, with 2 years left, your monthly payment is $377, and your remaining loan balance is $8,500, the calculation would be:


**(0.05/12) x 24 x $377 / $8,500 = 0.042 = 4.2% Actual Monthly Interest Rate**


The actual rate is usually slightly lower than the APR since the APR factors in fees and other costs. This formula allows you to calculate your true monthly interest cost.


To calculate the total interest you will pay over the life of your Canadian car loan, first multiply your loan amount by your Annual Percentage Rate (APR) to get your annual interest cost. Then, divide this number by 12 to get your monthly interest cost. Finally, multiply your monthly interest by the total number of months of your loan term.


The formula is:


**Loan Amount x APR / 12 x Loan Term (months) = Total Interest Paid**


For example, if you borrow $25,000 at 6% APR over 5 years (60 months), the calculation would be:


$25,000 x 0.06 / 12 x 60 = $3,750


So you will pay $3,750 in total interest charges over the 60 month term of this loan. This formula gives you your complete interest costs so you know the true cost of financing.

You can use this formula to calculate your estimated monthly car loan payment in Canada:


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


Breaking this formula down:


– Loan Amount = Original amount you borrowed

– Monthly Interest Rate = Stated APR / 12

– Loan Term = Number of months of your loan


Plugging in numbers, if you borrow $30,000 at 4% APR for 5 years (60 months), the calculation would be:


**Monthly Payment = [$30,000 x (0.04/12) x (1 + (0.04/12))^60] / [(1 + (0.04/12))^60 – 1]

= $573.43**


So your estimated monthly payment on this $30,000 car loan would be $573.43. This formula factors in compound interest over the life of the loan.

Used car loans typically have higher interest rates than new car loans in Canada. According to the Bank of Canada, as of 2023 the average interest rate for a used car loan is:


– 4-5 years – 8%

– 5-6 years – 9%

– 6-7 years – 11%


The interest rate can vary greatly depending on the applicant’s credit score, age of the used vehicle, size of down payment, and other factors. Those with excellent credit scores can qualify for rates around 3-5%, while borrowers with poor credit may pay rates over 15%. Shop around with lenders to try to find the best interest rate.

The monthly cost of a $15,000 car loan in Canada will depend on the interest rate, loan term length, taxes, and any fees. As an estimate, here is a breakdown of costs for a 5-year $15,000 car loan at different interest rates:


At 5% interest, with no extra fees:


– Monthly principal & interest payment: $284

– Total interest over loan term: $1,913


At 8% interest, with 15% sales tax, $300 doc fee:


– Monthly payment: $326

– Total interest + fees: $3,412


To calculate the monthly payment yourself, use an [auto loan calculator]( and input the loan amount, interest rate, term length, taxes and fees. Be sure to shop around for the best rates.

To qualify for the best possible interest rates on a car loan in Canada, you typically need a minimum credit score of:


– 720+ for new car loans

– 680+ for used car loans


Here are some average new and used car loan rates currently available from major Canadian lenders:

| Lender | Excellent Credit Score Interest Rate | Good Credit Score Interest Rate |


| RBC| 3.49% | 5.99% |

| TD | 3.99% | 6.99% |

| Scotiabank | 4.49% | 7.49% |

| BMO| 4.99% | 8.49% |


As you can see, having an “excellent” credit score over 720 can save you thousands of dollars in interest over the life of your loan compared to a merely “good” score. Improving your credit score before applying for an auto loan is highly recommended.

The longer your car loan term, the higher your overall interest costs will be in Canada. This is because you are borrowing the money for a longer period of time.


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


– 4 year term:

– Monthly Payment = $747

– Total Interest = $4,156


– 6 year term:

– Monthly Payment = $565

– Total Interest = $6,234


While the monthly payment is lower with the 6 year loan, the total interest paid increases by $2,078 compared to the shorter 4 year term.


In most cases, it is financially better to choose the shortest loan term you are comfortable with to minimize your costs.

Yes, making a reasonable down payment on your Canadian car loan can save you significant money on interest fees over the life of your financing.


For example, on a $30,000 car loan at 6% APR:


– $0 Down Payment:

– Loan Amount = $30,000

– Monthly Payment (5 years) = $609

– Total Interest = $7,404


– $6,000 Down Payment (20%):

– Loan Amount = $24,000

– Monthly Payment (5 years) = $487

– Total Interest = $5,523


By putting 20% down, you reduce needed borrowing by $6,000. This decreases your monthly payments, and saves $1,881 in interest fees.


Aim for a down payment of at least 10-20% if possible on your next auto loan.

Getting pre-approved for a car loan in Canada provides several key benefits:


**1. Leverage on interest rates:** Pre-approval allows you to lock-in current interest rates for up to 90 days while you shop for your new car. Rates fluctuate frequently, so this protects you from potential increases.


**2. Negotiating power:** Showing your pre-approval letter gives you leverage to negotiate the best possible price on your desired car. Dealers know you already have financing lined up.


**3. Faster buying process:** With your financing set, the purchase moves forward more quickly. You can complete paperwork faster and drive your new car home sooner!


**4. Wider variety of lender options:** Your own bank likely offers the best rates. But dealer financing and other lenders extend pre-approvals too, giving you more choices.


Getting pre-approved just makes financing your next car much easier and more affordable!

The main fees to be aware of on Canadian car loans include:


**Administration Fees** – Typically range from $300 to $700. Charged for processing your loan application.


**Origination Fees** – 0.5% to 2% of the loan amount as a fee to originate the lending.


**Prepayment Penalties** – If you pay your loan off early, some lenders charge a penalty fee for 1-3% of the remaining balance.


**Documentation Fees** – $50 to $150 for documentation and clerical work preparing your loan.


**Advance Loan Interest** – Interest accrued before your 1st payment is due. Added to your loan balance.


**Life, Disability, and Credit Insurance** – Optional but expensive premiums. Provide coverage if you can’t make payments.


Always ask lenders to fully disclose all fees in writing prior to signing your car loan agreement so you know the total costs.

Here are 8 tips for getting the lowest interest rates on your Canadian auto loan:


  1. **Check your credit score** -Aim for at least 720+ for the best rates
  2. **Shop multiple lenders** – Compare quotes from banks, dealers, credit unions, etc
  3. **Get pre-approved** – Lock in rates and show proof to negotiate car prices
  4. **Choose shorter loan terms** – 48-60 months have lower rates than 72-84 months
  5. **Make a down payment** – At least 20% down minimizes interest costs
  6. **Enroll in automatic payments** – Lenders give discounts for direct bank debits
  7. **Buy new or lightly used cars** – These qualify for lower rate tiers from lenders
  8. **Consider a co-signer** – Adding one with good credit can mean better rates


Following these tips when seeking out and negotiating your next auto loan can potentially save you thousands!

Whether there is a prepayment penalty for paying your Canadian auto loan off early depends on your financing terms and lender policies.


Many banks and lenders do NOT charge any early repayment fees on car loans. These include TD, Scotiabank, Desjardins, and some credit unions among others.


However, some institutions like RBC, BMO, and other financing companies do still charge prepayment penalties even for auto loans. These penalties generally range from 1-3% of your remaining loan balance if you pay off the financing early.


So when signing your loan agreement, always check if prepayment fees apply in the fine print. Confirm with your lender directly regarding their policies as well – it can save you hundreds for paying your car loan off faster!

Getting a creditworthy co-signer on your Canadian auto loan can help you qualify for significantly better interest rates, especially if you have little credit history or a low score yourself.


Here is how interest rates can improve with a co-signer:


| Credit Situation | Normal Rate | With Co-Signer | Savings |


Poor Credit Score | 15%+ | 6-8% | $5,000+ |

First Time Buyer | 8-12% | 3-5% | $2,500+ |

New Immigrant | 10-15% | 4-6% | $4,000+ |


A co-signer agrees to take equal responsibility for repaying the car loan if you default. Since lenders have double assurance of getting paid back, they reward this lower risk with a discounted interest rate.


Just be sure your co-signer has a strong credit score themselves, or else it may not make any difference. But used wisely, this strategy can save you thousands over the life of your auto financing.

Luxury and premium brand car loans generally have higher interest rates than mainstream brands in Canada. Current average rates are:


**Luxury Car Loan Rates**


– New luxury cars – 4-7%

– Used luxury cars – 6-9%


**Mainstream Car Loan Rates**


– New cars – 2-5%

– Used cars – 4-8%


The increased rates for luxury cars apply regardless of whether your credit score is excellent or poor. This is because lenders consider these types of vehicles higher risk due to their rapid depreciation and volatility in resale values.


However, luxury car buyers are often required to provide larger down payments of at least 20-30%. This helps counteract the higher interest rates to a certain extent.

In most cases, Canadian consumers get lower interest rates on auto loans by getting pre-approved financing from their own bank beforehand, rather than accepting dealer financing.


**Bank Loan Advantages**


– Lower interest rates (2-5% lower on average)

– Pre-approval locks in low rates

– Flexible terms and conditions


However, dealer financing can sometimes offer special discounted rates or cash incentives that make their loans worthwhile too.


**Dealer Loan Advantages**


– Special discounted interest rates on some models

– Potentially avoid loan application inquiries on your credit

– Instant loan decisioning on the spot


Overall though, checking with your personal bank or credit union first is wise to potentially save thousands over the life of your next car loan!

Get Approved Today

See if you qualify in under 60 seconds