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What is APR in Car Loans?

What is APR in Car Loans?

When financing a vehicle purchase in Canada, understanding the Annual Percentage Rate (APR) is crucial. The APR represents the total yearly cost of borrowing money for your car loan, including not just the interest rate but also any additional fees or charges from the lender.

The APR matters because it gives you an apples-to-apples comparison of the true costs across different lenders and loan offers. A lower APR translates to lower borrowing costs over the life of your auto loan. Even a small difference in APR can add up to hundreds or even thousands of dollars in savings (or extra costs) when stretched across a typical 4-7 year car loan term.

For example, consider a $30,000 car loan paid back over 5 years. At a 5% APR, your total interest paid would be around $3,700. But if you qualified for a 3% APR instead, you’d only pay roughly $2,200 in interest – a savings of $1,500 just from that 2 percentage point difference in APR.

The APR gives you a clear way to compare the bottom-line costs across all advertised low interest rates, cash incentives, and other promotions when shopping for an affordable car loan. It allows you to cut through the noise and find the best value financing package for your budget.

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How Car Loan APRs are Determined

When you apply for an auto loan, lenders consider several key factors to determine the APR you’ll pay. Your credit score and credit history tend to carry the most weight, but lenders also look at your income, employment status, the loan term and amount you’re requesting, and the size of your down payment.

Your credit score reflects your track record of repaying debts on time. A high score indicates a lower risk of defaulting on the loan, so lenders reward those borrowers with lower APRs. Canadians with credit scores above 680 generally qualify for prime rates, while scores below 600 put you in the subprime category with much higher APRs.

Steady employment and sufficient income are also essential, as lenders need to be confident in your ability to make the monthly payments over the full loan term. If your income is low compared to the loan amount or your job situation is unstable, expect a higher APR.

The loan term, or number of months you’ll take to pay it off, impacts the APR as well. Shorter loans tend to have lower rates, since the lender takes on less risk over that timeframe. Longer loan terms of 6-7 years make the loan costlier for the lender, resulting in an elevated APR.

Finally, the larger your down payment, the lower your APR is likely to be. A sizable down payment means you’re borrowing less and have more equity built into the vehicle from the start, reducing the lender’s risk exposure. Putting down 20% or more can help secure a very competitive rate.


Typical APR Ranges for Car Loans in Canada

Car loan APRs in Canada can vary significantly based on factors like credit score, loan term, vehicle type, and more. However, there are some common ranges that most auto financing falls within:


Best Rates (Excellent Credit): For borrowers with top-tier credit scores of 800+, the lowest advertised APRs on new cars can dip as low as 0% for special manufacturer incentives and promotions. More typical best rates range from 2.99% to 5.99% APR.

Good Credit: Those with credit scores in the 700-800 range can generally expect APRs between 4.99% and 7.99% from most lenders on new vehicles.

Average Credit: With scores from 600-700, APRs increase to the 8-12% range, though some lenders may charge higher for lower scores in this tier.

Subprime/Poor Credit: Borrowers with poor credit histories and scores below 600 face the highest APRs, often ranging from 16% up to 25% or even higher from certain subprime lenders.


In general, used car loans carry slightly higher APRs than new car loans across all credit tiers, often 1-3% higher. But the overall credit score ranges and spreads are similar.

Many automakers offer promotional 0% APR financing on select new models as incentives, but these are usually limited to buyers with excellent credit and may require larger down payments. More common are low APR cash incentives like 2.9% or 3.9% for 60-72 months from the manufacturer’s captive lender.


How to Estimate Your Car Loan APR

Before heading to the dealership or applying for an auto loan, it’s wise to get an estimate of the APR you may qualify for. This allows you to go in with realistic expectations and avoid being taken advantage of by unscrupulous lenders. There are a few ways to estimate your potential car loan APR:


Using Online Auto Loan Calculators: Many banks, credit unions, and third-party sites offer free auto loan calculators. Simply input details like your credit score, desired loan amount, loan term, and down payment, and the tool will provide an estimated APR range based on current market rates. These are just estimates, but they give you a good ballpark figure.

Getting Pre-Qualified/Pre-Approved: For a more accurate APR estimate, consider getting pre-qualified or pre-approved with a few different lenders. This involves a more formal application and credit check, but it results in actual loan offers with real interest rates you may qualify for. Just be mindful that these credit inquiries can temporarily impact your credit score.

Dealership Financing Rate Quotes: When shopping for a vehicle, dealers will be eager to offer you financing through their preferred lenders. While you shouldn’t take their first quoted APR, asking for a breakdown of the rate and fees gives you another data point to compare against your pre-approval offers and online estimates. Arm yourself with knowledge from multiple sources.


Tips to Get the Lowest Car Loan APR

While your credit score is the primary factor in determining your car loan APR, there are several strategies you can employ to secure the best possible rate. Here are some tips to help you get the lowest APR when financing your next vehicle purchase:


Improve Your Credit Score

Your credit score is the most influential aspect of your APR. Lenders use it to assess your creditworthiness and ability to repay the loan. A higher credit score translates to lower risk for the lender, resulting in a lower APR offer. Before applying for an auto loan, check your credit report for any errors and work on improving your score by paying down debts, maintaining a low credit utilization ratio, and making payments on time.


Make a Larger Down Payment

A larger down payment reduces the amount you need to finance, making you a less risky borrower in the eyes of the lender. Aim to put down at least 10-20% of the vehicle’s purchase price to qualify for more favorable APR offers. The more you can put down upfront, the better your chances of securing a lower interest rate.


Choose a Shorter Loan Term

While longer loan terms may result in lower monthly payments, they also mean paying more interest over the life of the loan. Opting for a shorter loan term, such as 36 or 48 months instead of 60 or 72 months, can help you qualify for a lower APR. Shorter terms are seen as less risky by lenders since you’ll be paying off the loan faster.


Compare Rates from Multiple Lenders

Don’t settle for the first APR offer you receive. Shop around and compare rates from various lenders, including banks, credit unions, and online lenders. Each lender has its own criteria for evaluating borrowers, so you may find better rates elsewhere. Be sure to compare APRs rather than just the interest rate, as the APR includes additional fees and charges.


Negotiate at the Dealership

When buying a car from a dealership, don’t be afraid to negotiate the APR along with the vehicle’s price. Dealers often mark up interest rates to increase their profit margins. Come prepared with pre-approved loan offers from other lenders as leverage, and be willing to walk away if the dealer won’t match or beat the rates you’ve been quoted elsewhere.


Understanding the Fine Print: Fees and Add-Ons

When negotiating an auto loan, it’s crucial to scrutinize the fine print for hidden fees and unnecessary add-ons that can inflate your APR. Dealers often tack on extra costs like administration fees, freight charges, and advertising fees, which get rolled into the loan and increase the amount you pay interest on over the life of the financing.

Extended warranties and other add-ons like nitrogen-filled tires or paint protection packages are also common profit centers for dealerships. While some of these may provide value, many are overpriced and can be safely declined without compromising your vehicle’s coverage or performance. Unless an extended warranty is a must-have for you, steer clear of these pricey extras.

Loan origination or processing fees are another area to watch out for. Some lenders charge upfront fees just for setting up the loan, which get baked into the APR. These can range from a few hundred to over a thousand dollars. Whenever possible, try to have these waived or opt for no-fee financing to avoid inflating your APR unnecessarily.


Subprime and Bad Credit Car Loans

For Canadians with less-than-ideal credit scores, securing an auto loan can be challenging. Those with subprime credit scores, typically below 670, are considered higher-risk borrowers by lenders. As a result, they often face higher APRs when financing a vehicle purchase.

Subprime car loan APRs in Canada can range anywhere from 14% to an eye-watering 29.99%. The exact rate depends on factors like your credit score, income, debt levels, and the vehicle’s value. Borrowers with scores in the 500s may see APRs at the higher end of that spectrum.

While these high interest rates can make a car more affordable in the short term by keeping monthly payments lower, they come with significant long-term costs. A 29.99% APR on a $25,000 car loan, for example, could result in over $15,000 in interest charges over a typical 5-year term. This effectively doubles the vehicle’s true cost.

Subprime auto loans also carry higher risks of becoming “upside down” or owing more than the car is worth due to faster depreciation. This negative equity situation makes it difficult to sell or trade-in the vehicle before the loan is paid off. Missed payments can also quickly send the loan into default and lead to repossession.

For those with poor credit unable to secure better rates, subprime financing may be the only option to get approved for an auto loan. However, borrowers should carefully consider the long-term costs and risks before taking on such a high-interest loan. Alternatives like getting a co-signer, making a larger down payment, or seeking a less expensive vehicle may provide more affordable financing.


APRs for Electric and Hybrid Vehicles

As governments and automakers push for greater adoption of electric vehicles (EVs) and plug-in hybrids, many lenders are offering special incentive rates to make financing these eco-friendly rides more attractive. Typically, APRs on EV loans can be 1-2% lower than comparable gas-powered models.

For example, major banks like RBC and TD may advertise EV purchase rates from 3.99% APR for qualified buyers, compared to 5.99% or higher for a gas vehicle. These discounted “green car” rates help offset the higher sticker prices of EVs like the Tesla Model 3 or Hyundai Ioniq 5. Manufacturers also frequently team up with captive lenders to promote low APR deals – Ford recently offered 0% financing for 60 months on the Mustang Mach-E through Ford Credit.

When comparing APRs on electric vs gas models, factor in the potential savings from never paying for gas again. The “fuel” cost for an EV can be as little as $200-300 per year, compared to $2,000+ annually for a gas vehicle. This helps make up for the higher upfront cost of an EV. Just be sure to look at total ownership costs rather than just sticker price.

Finally, don’t overlook federal and provincial incentives that can significantly reduce the purchase price of your EV or hybrid. The Canadian federal government currently offers a $5,000 rebate on eligible zero-emission vehicles, while Quebec’s rebate is up to $8,000. Ontario previously had its own EV incentive program, which was cancelled in 2018. These upfront discounts make a big difference in the amount you need to finance.


Car Loan Pre-Approval Tips

Getting pre-approved for an auto loan before visiting dealerships puts you in a stronger negotiating position and helps lock in a favorable APR. Pre-approval allows you to shop like a cash buyer and avoid being steered toward more expensive financing at the dealership.


Benefits of Pre-Approval:


  • Gives you bargaining power as a “cash buyer”
  • Locks in your APR before shopping
  • Streamlines the financing process
  • Lets you focus on negotiating the vehicle price


Where to Get Pre-Approved:


  • Your existing bank or credit union
  • Online lenders and loan marketplaces
  • Local credit unions or community banks


Documents Needed for Pre-Approval:


  • Proof of income (pay stubs, tax returns, etc.)
  • Proof of residence (utility bills, lease, etc.)
  • Details about the vehicle you want to buy
  • Your credit report and score


Getting pre-approved gives you the power of an all-cash buyer and ensures you get the best APR possible based on your credit profile. Just be sure to get rate quotes from multiple lenders to secure the most competitive offer before heading to the dealership.


Comparing Dealership vs Bank Financing

When it comes to securing an auto loan in Canada, you typically have two main options: financing through the dealership or getting a loan directly from a bank or credit union. Each choice has its own advantages and disadvantages to consider.


Dealership Financing Pros:


  • Convenience – The dealer handles everything at the time of purchase
  • Manufacturer incentives – Automakers often offer low APR deals through captive lenders
  • Negotiation power – You can use competing bank quotes to get a better deal


Dealership Financing Cons:


  • Potential markup – Dealers may mark up the interest rate to increase profits
  • Limited term flexibility – Loan durations are often restricted to standard terms
  • Tied to the vehicle – The loan can’t be used for a different car if plans change


Bank Financing Pros:


  • Potentially lower rates – Banks may offer more competitive APRs than dealers
  • Term flexibility – You can often choose any repayment schedule that fits your needs
  • Reusable financing – Secure pre-approval to shop at multiple dealers


Bank Financing Cons:


  • Extra legwork – You have to apply for the loan separately from the purchase
  • Stricter approval criteria – Income, credit score, and other factors are heavily scrutinized
  • Lacks incentives – Banks don’t offer the same manufacturer discounts and rebates


Car Buying Negotiation Strategies

Negotiating the APR is a crucial part of securing the best deal on your next car purchase. Even a small difference in the interest rate can translate to thousands in savings over the life of the loan. The key is to get lenders competing for your business and being willing to walk away if the offers aren’t favorable.

First, get pre-approved for financing from banks, credit unions, and online lenders before visiting the dealership. This gives you leverage to negotiate against the dealer’s lending sources. When you receive offers, ask each lender if they can beat the competition’s APR. Pit them against each other to drive down the rate.

At the dealership, don’t reveal your pre-approved APR until the very end of negotiations. Let the salesperson make their best offer first. If their financing rate is higher than what you’ve been approved for elsewhere, make a counteroffer or be prepared to walk away. Dealers want to make a sale and may be willing to match or beat your lowest APR to earn your business.

Timing is also important when negotiating APRs. Dealers often offer their best financing incentives during slower sales periods, like the end of winter or in late summer before the new model year arrives. If you’re not in a rush, consider delaying your purchase until these periods when automakers are more motivated to make deals.

Finally, don’t forget about rebates and other incentives that can lower your overall costs. See if you qualify for any cash allowances and use them as another bargaining chip. The more you can reduce the total amount financed through rebates and a low APR, the more affordable your monthly payments will be.


APR vs. Money Factor Leasing

When it comes to leasing a vehicle instead of buying, APR is calculated differently. Rather than an Annual Percentage Rate, leases use something called a “money factor” or “lease factor” to determine your monthly costs.

The money factor represents the amount of interest you’ll pay on the lease, expressed as a very small decimal number like 0.00125. To convert this to an equivalent APR for comparison purposes, you multiply the money factor by 2,400 (the approximate number of months in 24 months).

For example, if the money factor is 0.00125, the equivalent APR would be:


0.00125 x 2,400 = 3% APR


This allows you to compare lease rates and loan rates on an apples-to-apples basis. In general, lease money factors tend to be lower than typical APRs for loans, since you’re only financing the vehicle’s depreciation during the lease term rather than the entire purchase price.

However, leasing also involves additional fees like acquisition charges and disposition fees that can inflate your overall costs. Be sure to calculate your total lease obligation, factoring in the money factor/APR as well as these other fees, to determine if leasing or financing is the smarter choice.


Financing Through Captive Lenders

When shopping for an auto loan, you’ll likely come across offers from “captive lenders” – finance companies directly associated with major automakers like Ford Credit, Honda Finance, Toyota Financial Services, and others. These lenders specialize in financing vehicles from their respective brands and often provide enticing APR deals as incentives to choose their products.

The key advantage of going through a captive auto lender is access to low APR promotional rates, sometimes even 0% financing for well-qualified buyers. Automakers are able to subsidize these ultra-low rates to boost sales and stay competitive. You’ll rarely find APRs that low from banks or credit unions.

However, captive lenders usually only offer their best rates on new vehicles, and the low APRs may only apply for shorter terms like 36-60 months. There are also strict credit requirements – often you’ll need a credit score above 700 to qualify for prime rates from captive lenders.

When comparing captive lender financing to that from a bank or credit union, consider the overall costs. While banks may not offer tantalizing promotional APRs, their standard rates can be lower than captive non-promotional pricing if you have excellent credit. Banks also tend to be more flexible on loan terms for used vehicles.

Ultimately, the decision comes down to whether you want to take advantage of automaker incentives and rock-bottom APRs on a new vehicle, or prioritize longer terms and competitive rates on a used car or truck. Be sure to get quotes from both captive lenders and banks to find your best deal.


Refinancing Your Auto Loan

Even after securing a reasonable APR on your initial car loan, there may come a time when refinancing makes financial sense. By taking out a new loan at a lower interest rate, you can potentially save thousands over the remaining life of your auto financing. The key factors to consider are how much you’ll save versus the costs of refinancing.

Refinancing an auto loan is worthwhile if current rates are at least 1-2 percentage points below your existing APR. This rate difference provides enough interest savings to offset any fees from the new lender. Most financial experts recommend refinancing if you can lower your APR by 2% or more and plan to keep the vehicle for several more years.

When refinancing, be aware of potential fees like loan origination charges, early payoff penalties from your current lender, taxes, and other closing costs. These upfront expenses can diminish your overall savings. Most lenders advertise no-cost refinancing, but read the fine print carefully. There are almost always some fees involved when replacing an auto loan.

Additionally, extending your loan term to reduce the monthly payment often increases your total interest paid over the life of the loan. The best way to maximize savings from refinancing is to keep your remaining loan term the same or shorter while benefiting from a lower APR.


Impact of APR on Vehicle Affordability

The APR you secure for your auto loan has a significant impact on the overall affordability of your vehicle purchase. A higher APR translates to larger monthly payments, meaning more of your hard-earned money goes towards interest charges rather than paying down the principal balance.

To illustrate, consider a $30,000 car loan with a 6% APR paid over 5 years. Your monthly payment would be around $575. However, if you qualified for a lower 3% APR, your monthly payment drops to $535 – a savings of $40 per month or $2,400 over the life of the loan. This example highlights how a seemingly small difference in APR can substantially affect what fits within your budget.

One strategy to lower your monthly obligation is to extend the loan term, which reduces the APR offered by lenders. For instance, that same $30,000 loan at 6% APR paid over 7 years instead of 5 would decrease your payment to around $430 per month. While this may seem appealing, it’s crucial to understand the long-term costs.

Stretching out your loan increases the total interest paid over the full term. Using our example, the 5-year loan would cost around $4,500 in interest, while the 7-year loan would accrue over $6,000 in interest charges. So while you gain short-term payment relief, you’re paying considerably more for that vehicle in the long run.

Higher APRs also impact your loan-to-value ratio, which measures how much you owe versus the vehicle’s worth. The faster your car depreciates compared to the remaining loan balance, the higher your risk of going upside-down – owing more than the car is worth. This predicament makes it difficult to sell or trade-in your vehicle without writing a costly cheque.


Conclusion: Making APR Work for You

Navigating the world of auto loan APRs can seem daunting, but understanding the key factors that influence your rate is essential to securing the best deal. Your credit score, income, loan term, down payment amount, and even negotiation skills all play crucial roles in determining the APR you’ll be offered.

To get the lowest possible APR, take proactive steps like checking your credit reports, paying down debts to improve your score, and saving up for a larger down payment. Don’t be afraid to shop around and compare offers from multiple lenders, including banks, credit unions, online lenders, and the dealership’s captive finance company.

Remember, a lower APR translates to significant savings over the life of your car loan. Even a 1% difference in rate can amount to hundreds or even thousands of dollars in interest charges. By arming yourself with knowledge and negotiating confidently, you can ensure you’re getting the most favorable APR and keeping your overall vehicle ownership costs as low as possible.

Ultimately, the APR is a critical factor that impacts the true cost of your next car or truck purchase. By understanding how it works and actively pursuing the best rate, you’ll be in the driver’s seat when it comes to securing an affordable and manageable auto loan.

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Questions About APR

The APR, or Annual Percentage Rate, is the cost of borrowing money for a car loan or lease in Canada. It includes the interest rate plus any fees and is shown as a yearly percentage rate. A lower APR usually means a better deal on a car loan. Typical new car loan APRs in Canada range from 0-10% depending on your credit score and the lender.

APR on car loans in Canada is calculated by taking the total cost of the loan, including interest and fees, over the full loan term and converting it into a yearly percentage rate. The formula considers the loan amount, interest rate, loan length, and any origination fees or charges. This allows easy comparison between loans from different lenders.

To qualify for the lowest advertised APRs on car loans from most lenders in Canada, you typically need a credit score of at least 720. Some lenders may offer their rock-bottom rates for scores of 680 or higher. The higher your credit score, the lower the risk to the lender – so you can qualify for a lower interest rate and better APR.

According to current data, the average new car loan interest rate from banks in Canada is around 4-7%. Credit unions offer average rates of 3.5-6.5%. And captive automaker finance arms, like GM Financial, offer rates from 0-4% for those with excellent credit. Rates vary based on individual financial situations.

Some of the best advertised new car loan rates in Canada right now are:


– GM Financial: 0% APR

– Honda Financial Services: 0.99% APR

– Toyota Financial Services: 0% APR

– Ford Credit Canada: 0% APR


Keep in mind you’ll need a very good credit score, typically over 720, to qualify for these exceptional rates. And they are often for shorter loan terms of 2-4 years.

If your credit score qualifies you for a 0% APR car loan in Canada, it often makes sense to take the financing rather than paying the full cash price up front. A 0% loan has no interest, so you are just paying back the principal loan amount. This allows you to invest your money elsewhere or earn interest instead of paying all cash to the dealer. Just make sure you can pay off the 0% loan before rates rise at the end of the term.

Common fees that get factored into the APR calculation on Canadian car loans can include:


– Origination fee or administration fee to set up the loan

– Documentation fees for processing paperwork

– Registration and titling fees

– Extended warranty or insurance costs if financed into loan

– Sales taxes and other government fees


So watch out for fees baked into that advertised low APR offer. The more fees, the higher your effective borrowing cost.

The interest rate on a Canadian car loan is simply the annual percentage rate charged on just the borrowed principal amount. The APR includes the interest rate plus any origination fees, documentation fees, warranty costs and other charges baked into the total loan amount, all represented as a yearly percentage rate. So the APR gives you a more accurate picture of total borrowing costs.

Getting pre-approved for car loan financing in Canada is key to accessing the best possible rates and strongest bargaining position. Pre-approval locks in an APR and loan amount based on your credit score and income ahead of negotiations with the dealer. Then the dealer just needs to match or beat your pre-approved APR. Major Canadian banks, credit unions and Captive automaker finance companies all offer pre-approvals.

The lowest APRs on used car loans are typically offered by credit unions in Canada right now. Large credit unions like Coast Capital Savings, Prospera Credit Union and Meridian Credit Union advertise used car loan rates as low as 3.99% APR for members with good credit. Even lower rates around 1.99% APR are sometimes offered during sales events.

To qualify for the very best used car loan rates at credit unions in Canada, which can be under 4% APR, you typically need a credit score of at least 680-700. Major banks like RBC and TD may require higher scores of 720+ to access their top tier used car loan APR offers under 6% right now.

Most Canadian mortgage lenders allow a maximum gross debt service ratio (GDS) of 40% or less and total debt service ratio (TDS) of 44% or less. That means your total monthly housing costs plus all other debt payments should not exceed those percentages of your gross monthly income. A new $500 monthly car loan payment would add about 11% to your debt ratio calculations.

When applying for a car loan in Canada, most lenders require a government-issued Photo ID, proof of income through recent pay stubs or tax documents, proof of address through utility bills or bank statements, and your banking information. If financing a used car, you may also need the vehicle history report. Having all documents ready can speed up the application and approval process.

The ideal car loan term in Canada balances lower interest costs over time with comfortable monthly payments. A good benchmark is a 4-year loan term. Much longer terms have higher total interest costs. Much shorter may strain your monthly budget. You can always pay extra each month to pay off a 4-year loan faster and save on interest charges.

Putting down a 20% down payment on a car loan in Canada can help in several ways. It lowers the amount you have to finance, which gets you better rates. It also reduces your loan-to-value ratio which reduces risk to the lender and helps qualify for prime rates. If you trade in your vehicle during the loan, having equity established also puts you in a better position when financing the next car.

If you miss or are late making your monthly car loan payment with a Canadian lender, penalties and fees can quickly accumulate. There is usually a grace period of 10-15 days before late fees around $30 are assessed. If over 30 days late, it will negatively impact your credit score. After 2-3 months of nonpayment, the lender can issue a repossession order to retrieve the financed vehicle.

Adding a cosigner with good credit is a common tactic Canadians use when they don’t qualify for prime auto loan rates on their own. The cosigner agrees to be equally responsible for repayment, allowing the primary applicant to benefit from the cosigner’s higher credit score to get approved and access better APRs they wouldn’t qualify for solo.

If your auto loan application gets denied by a mainstream Canadian lender, here are some options that can help get you back on track for approval: wait 6 months and improve your credit score before reapplying; get a cosigner with better credit added to your application; provide larger down payment to reduce amount financed; or apply with alternative lenders that offer financing to higher risk applicants.

Currently, data shows the province with the lowest average new car loan rates is Quebec at 3.99% APR, followed by Ontario at 4.24%. The highest provincial average is in Newfoundland & Labrador at 5.99% APR. Used car loan APR averages also follow a similar pattern. Rates vary based on credit scores and other individual factors, but these provincial averages can serve as a helpful benchmark.

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