Calculating the Interest Rate on a Car Loan

So, you're just about to pull the trigger on a used car and need a loan to finance it? The first thing you should do is use the car loan calculators provided by various financial institutions, dealerships, and specialized websites.

Indeed, this type of tool is very useful and can give you great indicaticators regarding your future payments. All you have to do is specify the price of the vehicle you want to purchase, the value of the trade-in vehicle (and the balance owed, if applicable), the down payment, the desired term, and the expected interest rate.
As for that last point, whether you are dealing with the institution associated with the dealership or another lender, it's good to know what could influence the interest rate.

First, there is the credit rating. The lower your credit score, the higher the interest rates; you're a greater risk. The credit score calculation ranges from 300 to 900 points, and buyers with scores above 790 qualify for some of the lowest interest rates on the market. on the other hand, someone with a score of 449 or less can expect to pay rates starting at 11.99%. Some lender will even charge 20% or more for a used car loan.

An individual who has been through bankruptcy, is in a low-income situation, or is self-employed can also expect a higher financing rate. It's unfortunate, but it's a reality.

You should also consider having your credit report analyzed by a specialist. They may find errors (about 80% of reports have errors, according to the Credit Bureau of Canada). By correcting them, you could get a lower interest rate.

Secondly, the term of the loan can have an impact on interest rates. While not always the case, sometimes the shorter the term, the lower the interest rate. This is another good reason to avoid long-term loans.

Finally, it is important to point out that warranties and accessories sold with a vehicle should not have any impact on the financing rate. Some dealers use a dubious practice by offering a lower rate if the consumer agrees to purchase certain products, such as an extended warranty for the entire financing term in order to "secure the loan".

The Autorité des marchés financiers is clear: it is illegal for a financial institution to require the purchase of related products in order to reduce a rate. "A bank will never lower a financing rate because of the purchase of products. The decision is always up to the merchant, who has agreements with financial institutions, who knows their products, and who knows how to juggle with them," explains Antoine Joubert, a journalist with The Car Guide.