What Is the Average Interest Rate for Car Loans in Canada?

Research suggests that around 40% of Canadians take out a loan to buy a new car. Of course, if you’re shopping around for a vehicle, it’s wise to set a budget. When you’re budgeting, you’ll need to factor in running and maintenance costs, as well as the cost of monthly payments for your car loan. 

Interest rates vary, and they will affect how much you pay for your car in the end. In this guide, we’ll take a closer look at the average car loan interest rate in Canada. 

What Is the Average Interest Rate for Car Loans in Canada?

Figures from Statistics Canada show that the average auto loan rate in Canada in 2023 is 6.07%. It’s important to note that average car loan rates in Canada provide an insight into how much consumers can expect to pay. The exact figure will vary according to the individual, but there are multiple factors that affect the rates that lenders offer.

The majority of Canadians pay interest rates of 3% to 7% on car loans, but some customers may be offered higher or lower interest rates depending on their financial situation. 

Interest rates on auto loans have increased over the past two years. In 2020, the average car loan interest rate in Canada was 4.38%. 

Using a car loan calculator can help you to get an idea of how much it will cost you to take out an auto loan. Here’s an example that outlines how interest fees work:

• Loan total: $36,000
• Term: 84 months
• Interest rates: 4.5% (good credit score) 10% (fair credit score)
• Monthly payments: $515 (4.5%) $615 (10%)
• Total interest payment: $6,215 (4.5%) $14,630 (10%)

What Factors Affect Car Loan Interest Rates?

The interest rate on used cars in Canada varies according to several factors, which include:

New or Used Car

The average interest rate for a car loan will depend on whether you’re looking to buy a new or used vehicle. Typically, interest rates are higher for used cars, but this is not always the case. The lender will evaluate multiple factors when determining the rate it offers to each customer. If you’re taking out a personal loan and the vehicle acts as collateral, the lender will take this into consideration and may adjust the interest rate to lower risks if the car is damaged or the value deteriorates more than expected. 

New cars may be available at 0% for customers with good credit history. In most cases, the lowest interest rate available for used car loans is around 4%. 

Your Credit Score

Your credit score is a numerical figure that is determined by credit bureaus. Lenders and banks use credit scores to assess the level of risk the customer poses. A high number represents a good or excellent score, while a low number indicates a poor credit rating. The higher your credit score, the better the interest rates available for loans, including car loans. 

The average credit score in Canada is approximately 650 according to TransUnion. A score of 650-750 is considered ‘good,’ while a score of over 750 is categorised as ‘excellent.’ With a good credit score, you can access preferential interest rates and your chances of borrowing money are higher.

If your credit score is below average, you may find it harder to borrow money and the interest rate on your car loan will be higher. If your credit score is very low, your application may be rejected. If you do secure an auto loan, the interest rate may be above 10% because the lender considers you a high-risk client. 

Loan Term

When you’re comparing car loan rates in Canada, it’s important to consider the term. This is the duration of the agreement. Longer terms usually carry higher interest rates, which increases the amount you’ll pay overall. 

Down Payment

The bigger the down payment you make on the vehicle you’re purchasing, the lower the interest on your car loan will likely be. Most people put down a deposit of 10% to 20%. Some lenders offer loans for buyers with no down payment, but they usually have higher interest rates. 

Your Debt-to-Income Ratio

Your debt-to-income-ratio is a calculation that provides lenders with information to help them decide whether or not you’ll be able to pay back your loan. The figure compares recurrent income against regular outgoings. If your debt is large and your income isn’t great, you’ll find it harder to get a loan. If you do succeed, the interest rate will be higher than average. 

Tips for Finding the Best Car Loan

If you’re looking for a new or used car, it’s wise to take some time to find the best car loan rates in Canada. Here are some tips to help you save money:

• Save as much as you can for a down payment.
• Try to improve your credit score by paying bills on time, clearing debts, and reducing your debt-to-income-ratio before you apply for a car loan.
• Compare deals and offers from different lenders.
• Negotiate prices with dealers.
• Consider getting a guarantor or a co-signer if you have a poor credit score.