Whether you’re buying a new or used car, odds are you’re going to be taking out a car loan. But if this is your first time buying a car or making a purchase of any kind this substantial, you might not be aware of how large loans work in Canada. So, we’re going to explain how car loans work to give you a better idea of what to expect!

Main Factor of Car Loans

One key aspect that demands attention is the interest rate associated with car loans. Car loan interest rates in Canada significantly determine the overall cost of financing and can impact your monthly payments. A range of factors can impact your car loan interest rates. Some factors are within your control, but others are outside your control. There are 3 main factors when it comes to the total amount, you’ll be paying on your car loan; the loan amount, the length of the loan (aka loan term), and the APR (annual percentage rate), otherwise known as interest.

We’ll go over these 3 factors one by one.

Loan Amount

The amount you borrow can influence the interest rate. Larger loan amounts might come with higher rates, while smaller loans could qualify for more favourable terms.

Loan Term

Opting for a longer loan term may seem appealing due to lower monthly payments, but it can result in higher overall interest costs. Lenders may offer less favorable interest rates for extended loan terms, especially for borrowers with weaker credit profiles. Shorter loan terms typically come with lower interest rates but require higher monthly payments.

APR (annual percentage rate)

This is your interest, an additional cost you’ll have to pay on a car loan. Interest rates are added on by borrowers because they need to make money on your loan. The average annual interest rate on a car loan Canada is around 4% for new cars and 8% for used.

Factors That Impact the Interest Rate

You’ll be a more informed car shopper if you know the factors that can affect the interest rate on your car loan. Here are some of the tips to help you secure the best interest rate possible.

1. Larger Down Payment

With a larger down payment, the lender is giving you less cash to buy the vehicle and you’re reducing its negative equity. This help lowers the lender’s risk, which can help reduce your interest rate. Lenders often reward larger down payments with better terms.

2. Shorter Loan Term

Opting for a shorter loan term can lead to significant savings in car loan interest rates. Although shorter terms result in higher monthly payments, a larger portion of these payments goes toward reducing the principal balance rather than interest charges.

3. Improve your Credit Score

Your credit history is significant when seeking a car loan. Those with excellent credit scores typically receive lower interest rates, while lower credit scores may result in higher rates or difficulty securing a loan.

4. Newer Vehicle

Whether a car is new or used can affect the interest rate on a loan for it. Rates on loans for used cars are typically higher than on loans for a new car. Opting for a new car will often net you the best interest rate overall — especially considering many automakers offer special financing from their captive financing arms.

5. Income Stability

Lenders frequently evaluate a borrower’s employment stability and income reliability when determining car loan interest rates. A consistent job and dependable income can have a positive impact on the interest rate offered.

Conclusion

Whether you buy a new or used car, carefully considering your financial situation is key to making educated decisions. It’s vital that you stay informed, compare offers, and choose the option that aligns with your budget and long-term financial goals. If you need help planning or setting your financial goals, reach out to DM Tax Accountants in Surrey, BC. We can help!