Car Loan Interest Rates
The 0% loan sounds fantastic, but do you qualify for it, and do you understand the costs built into a standard car loan? We’ll walk you through the factors affecting what sort of loan you can acquire andhow it influences the auto loan interest rates you pay in Canada.How does the Bank of Canada affect my interest rate? In order to create stability for our national currency, the Bank of Canada encourages economic growth while also trying to put a cap on inflation where possible. The Governing Council of the Bank of Canada establishes what is called an overnight rate for lending money. You may know it as the Key Interest Rate,which determines the daily (overnight) lending rate between different financial institutions. Every five years, the federal government has an inflation control target. Since 1991, that target has been hovering between 1-3%.
Many economists have stated that 2% inflation allows for economic growth without allowing damaging inflation rates. When our economy gets hotter and inflation increases, the BOC may elect to raise interest rates. That makes borrowing money more expensive, which slows down the economy stems inflation. When the economy is weaker, the Bank may opt to cut interest rates to make borrowing cheaper. That incentivizes both lenders and borrowers when it comes to lending and borrowing. In October 2016, the BOC overnight rate was 0.50%, the lowest rate in national history. As of January 2018, rates went up slightly, to 1.25%. By comparison, the early part of the 1980s saw a peak of 21%. Our Key Interest Rate impacts individual lenders. The less it costs to borrow, the less lenders can profitably charge individual borrowers for things like auto loans or home mortgages, as well as other loan-related products. So while it’s great to keep your credit rating squeaky clean, because it does affect Canada-nudged by both national and international economics-that determines the range of rates available to individuals.
What are the factors that affect my interest rate?
The interest rate you weight in at doesn’t include all the non-principal payments on an auto loan. These types of payments include document preparation fees, title fees, filing fees, and warranty charges. If you want a complete figure, check the annual percentage rate (APR). The APR is comprised of every finance charge associated with your loan, rounded up as an annual rate. When you apply for a loan or head for the dealerships to shop for a car, be sure to ask for the current APR. There’s more to an auto loan than that 0% interest enticement.
1. Credit history
Congratulations to those of you with a great credit score, but your credit history is more than a number. The main purpose of your score is to provide lenders with a good idea about your credit history and your risk level for future credit. In Canada, scores range from 300-900, and we have two main credit- reporting agencies: Equifax and TransUnion. Credit scores are based on two main categories: a borrower’s debt-to-income ratio and their bill-payment history. Other events that show up in your credit score: charge-offs, judgments, or collections. There’s a big correlation between your personal credit score and the interest rate you can expect to pay for an auto loan. Higher scores equal lower rates, with zero-percent rates reserved for those who rank scores at 700 or higher. Those with mid-range scores in the 600s will pay slightly higher interest rates, while a score below 500 will very likely mean a much higher interest rate. It could even negatively impact your ability to get approved for a loan in the first place.
Bankruptcy causes borrowers to start with the lowest credit score until they rebuild their credit. That takes time, however, so what can a bad credit borrower do about purchasing a much-needed car? Low credit borrowers may rely on a co-signer for their loan. A qualified co-signer has a higher credit score than you (family member, close friend) who agrees to take legal responsibility for your loan if you default. The lender may see this as added security for the loan risk and may even offer a lower interest rate. Approval is also easier with a qualified co-signer on board. Other ways to improve that score include taking a good look at the credit mix you manage. Lenders like to see a mix of revolving (credit cards, for example) and installment payment (mortgages, student loans) credit. It’s great if you have repaid loans in the past, but lenders also want to know how you’re managing your credit in the present. This is how having up-to-date credit accounts can help you secure a lower interest rate. Note the phrase up-to-date. That does not mean having four maxed-out cards in your name.
2. Loan term
Auto loans that exceed 60 months have higher interest rates. The longer the loan term, the greater the risk to the lender. Will your credit worthiness and dutiful repayments continue over a longer period of time? As the great John Lennon once said, “Life is what happens when you’re busy making other plans.” Shorter loan terms-even if the interest rate stays steady-allow for fewer payments that are purely dedicated to making interest payments. If you can manage higher monthly payments, take this route-but only if you can truly handle making larger payments. To get the lowest possible interest rate, choose a shorter loan term if it’s financially possible to do so. You will most definitely save money in the long run.
3. Down payment
No money down sounds great in theory, but it drives up your auto loan interest rate. A down payment achieves a couple of things: with the lender lending you less, their risk decreases, and the fact that you prepared to make a down payment indicates that you have good financial habits. A down payment isn’t always in cash form. If you trade in your current vehicle, it may be counted as a sufficient down payment. Any form of down payment puts you in line to snag a more favorable interest rate, because in basic terms, it reduces the amount owed, and shrinks those monthly payments because the principal of the loan decreases.
4. Other financial factors
It’s not just your score, the loan duration or the down payment that influence the interest rate you can acquire. Your current job status is ideal to a lender if you’ve had at least two years of steady employment. Your credit worthiness today and in the future depends on stability. Come prepared to show the lender recent pay stubs, and know too that your employer may also be called to confirm your employment status. If your work history seems a bit unstable, or if you’re just starting out in your field, a larger down payment may offset the impact of that limited work history.
Another alternative is to choose a vehicle that doesn’t strain your budget quite as much. This will likely inspire a lender to feel more confident about your stability, which may lead to a lower interest rate. Your debt-to-income ratio is another key factor. This is the income you make versus the monthly debts and expenses you are carrying. It may surprise you to learn that the net amount of your paycheck is less influential than how you spend that paycheck. High income and big spender habits is not a magic formula. Lots of lower income borrowers with conservative spending habits look more financially stable on paper. Dealerships are more motivated than banks to find you a workable solution. They want to sell cars and understand that finding financing options that work for their customers can make or break a deal.
As you can see, the interest rates a lender can offer take a number of factors into consideration, which makes it impossible to provide a truly accurate interest rate calculator to suit all inquiries. The good news is, that with so many variables at work in determining the interest you may pay, the flexibility means that if you fall short in one area of the calculations, you might just be able to make it up with another element of your financial habits. Talk to your dealership or financial institution honestly about what you have to work with, what your goals are and what your comfort level is. The risk isn’t only the lender’s, after all.