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What's Considered a Good Car Loan Interest Rate

What's Considered a Good Car Loan Interest Rate

Buying a new or used vehicle is one of the biggest purchases Canadian consumers make. With new car prices averaging over $42,000 in 2023, most shoppers need to finance their auto purchase through a car loan. Interest rates directly impact how much you’ll pay over the life of the loan. Even a couple percentage points on your car loan’s APR can mean thousands of dollars in extra interest charges.


With auto loan rates rising across Canada, it’s more important than ever to understand what is considered a good interest rate. This allows you to shop around, negotiate the best deal, and potentially save a lot of money. While your individual rate will depend on credit score, loan term, and other factors, having a benchmark for good interest rates is key.


This comprehensive guide examines current auto loan rates in Canada by credit tier. We’ll look at what is generally seen as a good rate versus a bad rate, along with tips for getting approved for the lowest rate possible. Whether you’re buying new or used, understanding interest rates can ensure you don’t overpay on your next car.



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What Impacts Car Loan Rates

When applying for auto financing, the interest rate you are offered will depend on several key factors. Your credit score and credit history are the main criteria lenders use to determine the rate they will provide. In general, those with excellent credit scores in the 800+ range will qualify for the lowest interest rates from most lenders. But even borrowers with fair or average credit can still find competitive car loan rates if they take the time to shop around.

Here are some of the major influences on the interest rate you will be offered on a car loan:

 

  • Credit score and credit history – The higher your score, the lower the rate lenders will offer. Those with scores below 650 will pay the highest rates.
  • Down payment amount – Putting more money down upfront as a down payment will lower the amount financed, which can help reduce your interest rate.
  • Loan term length – Shorter loan terms often have lower rates. Aim for 48-60 months if possible.
  • Type of vehicle – New cars tend to have better rates than used ones.
  • Overall economic conditions – When rates are rising generally, auto loan rates will be higher.

 

Understanding these key influences provides the basis for getting the best possible deal on your next auto loan.

 

Average New Car Loan Rates

New car buyers tend to get better interest rates, especially those with great credit. Here’s a breakdown of the average new car loan rates in Canada currently based on credit score:

 

800+ Credit Score

Those with credit scores of 800 or higher will typically qualify for the very best rates on a new car loan, often as low as 3.5%. This is considered excellent credit, so lenders view these borrowers as very low risk.

 

750-799 Credit Score

New car shoppers with credit scores in the very good range of 750-799 can expect average interest rates around 4.5% currently. While not quite as low as 800+ credit, this is still a very competitive rate.

 

700-749 Credit Score

Those with good credit scores from 700-749 will usually see new car loan rates averaging around 5.5%. This is toward the higher end of what’s considered a good rate, but still reasonable for good credit.

 

650-699 Credit Score

Drivers with fair credit in the 650-699 range are looking at average new car interest rates of approximately 7% right now. This is starting to get into subprime territory but can still be workable.

 

Under 650 Credit Score

For those with credit scores under 650, new car loan rates will be high, averaging 8% or more in most cases. Poor credit means very high risk for lenders, so rates are elevated.

 

Used Car Loan Rates

Since used vehicles carry more risk, interest rates tend to be at least a full percentage point higher compared to new cars. Here are the current average used car loan rates based on credit score:

 

800+ credit score

4.5%

 

750-799 credit score

5.5%

 

700-749 credit score

6.5%

 

650-699 credit score

8%

 

Under 650 credit score

9%+

 

What is a Good Car Loan Rate?

When shopping for auto financing, one of the most common questions is “What is considered a good interest rate?” The answer can vary quite a bit based on whether you are buying new or used, as well as your credit score.

For new cars, interest rates below 5% are generally considered excellent. New car buyers with credit scores above 760 should qualify for rates in the 3-5% range from most lenders. Those with scores between 700-759 can expect to see new car loan rates averaging 5-7%. Subprime borrowers under 700 will pay the highest rates over 8%.

Used car interest rates are typically at least 2 percentage points higher compared to new. For used cars, rates under 7% are good for buyers with very strong credit over 720. Those with average credit in the 680-719 range should aim for used car interest rates under 9%. Subprime used car buyers will pay 10% or more in most cases.

It’s important to compare rates from multiple lenders to find the best deal. Getting pre-approved first gives you extra negotiating power. Those with excellent credit have the most leverage to secure low auto loan rates under 3-4% for new cars and 5-6% for used.

 

Recommended Loan Terms

When financing a car purchase, most lenders will offer loan terms ranging from 24 months up to 84 months (7 years). The longer the loan term, the lower your monthly payment will be. However, longer loans also mean you pay more interest over the full term.

Many experts caution buyers about going for extended 6-7 year loans just to get lower payments. You end up paying thousands more in interest costs over the life of the loan. There’s also a higher risk of being underwater on the loan if you want to trade in the vehicle before it’s paid off.

For most car shoppers, a loan term of 48-60 months offers a good balance between affordable monthly payments and total interest costs. Loans of 5 years or less help consumers save money compared to very long 6-7 year financing. A 60 month loan is a popular option that keeps payments manageable for many budgets.

The best advice is to choose the shortest loan term you can afford based on your budget. Opting for 48-60 month loans instead of 72-84 month financing can potentially save you hundreds or thousands of dollars over the life of the loan if you have the budget for the higher monthly payment.

 

Getting Pre-Approved

One of the best ways to ensure you get the lowest possible interest rate is to get pre-approved for financing from multiple lenders before visiting dealerships. This allows you to compare rates and go into negotiations armed with your best offer.

Getting pre-approved has several key advantages:

 

  • You can shop and compare rates from banks, credit unions, and online lenders without affecting your credit score.
  • Pre-approvals are based on a soft credit check that doesn’t impact your score.
  • Having a pre-approval letter in hand strengthens your negotiating position.
  • It prevents dealers from markup up rates, since you already have an offer.
  • You can negotiate among multiple lenders for the best rate.
  • Dealers will often try to beat your pre-approved rate.
  • There are no obligations with a pre-approval, so you can still shop for the best financing.

 

Spending the time upfront to get pre-approved makes the financing process smoother and can save you thousands of dollars in interest over the loan term. Having offers from multiple lenders also lets you pit them against each other to negotiate the lowest rate possible.

 

Improving Your Car Loan Rate

If your credit score or down payment amount puts you in a higher interest rate range, there are steps you can take to improve your rate and save money:

 

Put Down a Larger Down Payment

The more money you put down upfront, the lower risk you are to the lender, so they will often provide a better rate. Even an extra few thousand dollars down can make a difference. Going from 5% down to 15% down could potentially improve your rate by 1-2 percentage points. Having at least 20% down shows the lender you are financially committed to the purchase.

 

Increase Your Credit Score

Improving your credit score takes time, but can pay off substantially in better auto loan rates. Pay all your bills on time, pay down balances, and dispute any errors on your credit report. Aim to get your score over 700, or ideally above 750, to qualify for the best rates. Each extra 50 points could save 1-2% on your auto loan APR.

 

Watching the Fed

Interest rates on car loans are directly influenced by the federal funds rate set by the Bank of Canada. This key interest rate impacts borrowing costs economy-wide. When the Bank of Canada raises or lowers rates, lenders adjust their prime rates accordingly. Most auto loans are variable rate loans tied to the prime rate. So if the prime rate goes up, your auto loan APR will also increase.

In 2022 and early 2023, the Bank of Canada has been aggressively hiking its benchmark interest rate to combat high inflation. This has led to higher loan rates across the board. The Bank of Canada’s overnight rate was just 0.25% in early 2022 but has climbed to 4.5% as of February 2023. This has pushed up prime rates and in turn, made auto financing more expensive.

Many economists expect the Bank of Canada to pause rate hikes or just have a couple more small increases in 2023 after the rapid rise over the past year. Once rates stabilize, auto loan costs may start to level off as well. But it still pays to lock in fixed rate financing as soon as possible, especially if you have strong credit.

 

Average Total Interest Paid

Over the life of a typical 5-year car loan, buyers end up paying a significant amount of interest charges. For example, on a $30,000 loan at 6% interest, you would pay around $5,000 in total interest over those 5 years. That’s money that provides no benefit besides allowing you to finance the vehicle.

Here’s a look at the total interest paid on some common auto loan amounts and rates:

 

  • $20,000 loan at 4% interest over 5 years – $1,811 total interest
  • $25,000 loan at 5% interest over 5 years – $2,590 total interest
  • $30,000 loan at 6% interest over 5 years – $5,000 total interest
  • $40,000 loan at 7% interest over 6 years – $9,120 total interest

 

As you can see, the longer the loan term and higher the interest rate, the more interest you end up paying over the full loan. That’s why it’s smart to shop around for the best rates possible and aim for shorter loan terms if you can afford the higher monthly payment. Paying less interest saves a lot of money over the years.

 

Car Loan Calculators

Car loan calculators can help you estimate your monthly payments and see how factors like loan amount, interest rate, and term length impact costs.

For example, on a $30,000 loan at 4% interest for 60 months, you would pay:

 

  • Monthly payment: $554
  • Total interest paid: $2,640

 

But if you could get a 2% rate, you would pay:

 

  • Monthly payment: $525
  • Total interest paid: $1,500

 

That’s a savings of $1,140 in interest charges just by getting a lower rate. Online car loan calculators from lenders like TD and Scotiabank let you estimate costs by inputting details on the loan amount, rate, fees, trade-in value, and other factors.

Playing around with the numbers helps you understand the impact of your financing terms and shop for the best rate.

 

Alternatives to Financing

While financing a car purchase is common, there are other options Canadians may want to consider:

 

Buying Outright

Paying cash upfront for a vehicle avoids financing charges entirely. This works best for those who have been saving up for a car and can pay the full amount from savings. It gives complete freedom and flexibility since there are no monthly payments. However, few buyers can afford to pay $20,000+ in cash for even a used car purchase.

 

Leasing

Leasing has become popular in Canada as a way to drive newer model vehicles for lower monthly payments compared to financing. You basically rent the car for 2-4 years. At the end of the lease term, you return the vehicle instead of owning it. While leasing seems attractive and payments are lower, you are limited on mileage and have nothing to show for the payments after the lease ends.

 

Other Costs of Car Ownership

The interest rate is just one part of the total cost of owning a vehicle. It’s important to factor in other recurring expenses so you can budget properly.

 

Insurance

Car insurance is mandatory in Canada and rates vary widely based on your location, driving record, vehicle type, age and other factors. Auto insurance costs can range from $1,000 to over $5,000 per year. Getting quotes from multiple providers can help find the best rate.

 

Gasoline

With gas prices fluctuating, fuel costs are a big concern for drivers. The average Canadian spends around $2,000 per year on gas. Choosing a fuel efficient vehicle can save money, along with modifying driving habits.

 

Maintenance

Ongoing maintenance like oil changes, new tires, brake repairs and other services are required to keep a vehicle running safely. Maintenance costs can average $800 to $2,000 per year depending on the age and type of vehicle. Newer cars tend to have lower maintenance costs. Building a savings fund for repairs is recommended.

 

Conclusion

When shopping for a car loan, understanding average rates and what is considered a good interest rate is crucial. Those with excellent credit scores above 750 can often qualify for rates under 5% on new cars and 6% on used. However, even borrowers with fair or average credit scores can find competitive rates under 10% with some lenders.

The key is to check your credit reports and scores first, then get pre-approved with multiple lenders before visiting dealers. Having loan offers in hand allows you to negotiate the best rate. Online lenders, credit unions, and your own bank are all good options for pre-approval and comparing rates.

Also be sure to run the numbers on total interest costs over the loan term. Opting for shorter terms of 3-5 years can save thousands in interest compared to very long 6-7 year loans, if you can afford the higher monthly payment. But the most important advice is to shop around and negotiate – don’t just accept the first interest rate you’re offered.

 

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Questions About What is a Good Rat on a Car

A good car loan interest rate in Canada is typically below 5% for borrowers with excellent credit (scores over 720). Rates between 5-7% are still considered decent. Anything over 8% is generally too high. The best rates are usually under 3% from lenders like credit unions. Your individual rate will depend on credit score, loan term, down payment, and other factors.

According to Ratehub.ca, the average interest rate on new car loans in Canada in 2023 was 5.99% for terms up to 84 months. For used cars, the average rate was 8.99% in 2023. Rates have climbed from 2022 when new car loan rates averaged 4.99% and used car rates averaged 7.49%.

To qualify for the very best car loan rates in Canada below 3%, you typically need a credit score of at least 720 or higher. With a score in the good range between 680-719, you can expect to see rates around 5%. A fair or average credit score between 620-679 will get rates from 6-8% from most lenders.

As of January 2023, the prime rate set by the Bank of Canada is 4.7%. The prime rate influences the interest rates lenders charge consumers including for car loans. When the prime rate goes up, auto loan rates also tend to go up. So car loan rates have been rising with the increases to the prime rate recently.



In Canada, providing a down payment of 20% or more on a new car can help reduce your auto loan interest rate by up to 4 percentage points compared to no down payment financing offers. Even just 10% down can get you 1-2% off loan rates from most lenders.

Here are some current new car loan interest rates from major Canadian banks as of January 2023:



TD Canada Trust – 2.99% for Tier 1 credit

RBC Royal Bank – 3.99% for Prime+ customers

Scotiabank – 4.99% for Scene+ members

CIBC – 5.99% standard rate

BMO Bank of Montreal – 6.99% standard rate

Some of the best options for bad credit car loans in Canada include:

 

– Fairstone Financial – up to $75,000 with rates as low as 4.99%

– CreditUnions – personalized rates, approvals to 650 scores

– CarsOnCredit – subprime financing up to 9.99% interest

– CarLoansCanada – guaranteed approvals for bankruptcy/consumer proposals



Some of the best new car lease deals available in Canada early 2023 include:

 

– Nissan Sentra lease from $149 bi-weekly with $0 down

– Hyundai Elantra lease under $200 per month

– Subaru Impreza lease from $179 per month

– Toyota Corolla lease from $177 bi-weekly at 1.49%

– Honda Civic leasing for $149 bi-weekly with $500 down



Quebec has the lowest average car insurance rates in Canada due to its public auto insurance system. Average premiums in Quebec run about $730 per year compared to over $1,300 annually in other provinces like Ontario and Alberta. Manitoba and Newfoundland also have relatively low average premium costs.

Tips to reduce your monthly car loan payment include:

 

– Putting 20% or more as a down payment

– Choosing a longer loan term like 6-7 years

– Opting for bi-weekly instead of monthly payments

– Paying off other debts to improve your debt ratio

– Having a co-signer with better credit co-apply

– Looking for 0% financing offers from automakers

Watch out for these common fees when financing a new or used car purchase in Canada:

 

– Documentation fee – can be $300-$700

– Lien registration fee – $15-$60

– Dealer admin fees – average around $600

– Extended warranty cost – can add thousands

– Added extras like rustproofing, paint sealant

– Prepayment penalties if paying off early

Yes, getting pre-approved before shopping for a new or used car in Canada is highly recommended. It allows you to know your budget, lock-in competitive rates, negotiate the best deal without financing delays, and avoids too many credit checks from multiple dealer applications.



The ideal car loan term is 4-5 years in Canada. This balances getting affordable monthly payments while not paying too much extra interest over the life of the loan. 6-7 year loans are popular options but cost significantly more total interest. Avoid 8 year terms unless absolutely necessary to get payments low enough.

If your credit score has improved significantly since getting your car loan, you may be able to refinance the loan at a lower interest rate, especially if rates have also dropped. Another option is making extra lump sum payments to pay off the loan faster and reduce interest costs over time.

Incentives for buying electric and hybrid vehicles in Canada include up to $5,000 off from the federal government and additional provincial rebates up to $8,000 in Quebec and $1,500 in British Columbia. There are also some local municipal incentives for EVs and special electricity rates.

For gas, the average Canadian spends about $2,000 per year driving 15,000 km in a mid-size sedan. Maintenance and repairs average $800 annually for a 3-5 year old used car. New cars under warranty average about $350 per year for maintenance like oil changes and tires. Total estimated operating costs are $3,150 per year.

The brands and vehicles that typically have the highest resale value retention in the Canadian used car market include Toyota trucks, luxury makes like Lexus and Porsche, as well as the Toyota Corolla, Honda Civic, Jeep Wrangler and Dodge Challenger according to Canadian Black Book data.

Selling privately typically nets about $1,000+ more money compared to trading in your car to a dealership in Canada. However it takes more time and effort meeting potential buyers for test drives, negotiating prices, transferring ownership properly, etc. Ultimately depends on how much extra money is worth the hassle.

When financing a used private sale vehicle purchase in Canada, you’ll need:

 

– Used Vehicle Information Package from seller

– Safety standards certificate on car

– Emissions test results (where required)

– Lien check to verify no outstanding loans

– Bill of sale signed by buyer and seller

– Vehicle registration transferred to new owner

Two good options for obtaining a free used vehicle Carfax report in Canada include:

 

– Get a report using the car’s VIN from Carfax Canada’s website

– Many auto insurance providers like Desjardins offer complimentary Carfax reports

 

This allows you to verify any damage or accident history before buying a used car.

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