How Are Car Loan Rates Calculated In Canada – Factors to Consider

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Borrowing a car loan? On comparing the various features of this loan, you must be questioning what is the average car loan interest rate in Canada and how you can get the best deals from your lender. The interest rate that you are charged on borrowing a loan is an important part of the loan agreement. It is also a source of income for banks and lenders. When you borrow from a bank or an online loan provider there are hardly any chances of getting your loan without having to pay any interest but you might qualify for a zero percent financing option with your car dealership. 

If you are looking forward to borrowing your loan from a bank or loan provider, this article is your guide on understanding interest rates and how this amount affects your car loan payment. In this article, we will be sharing with you all about the average interest rates in Canada on borrowing a car loan and how you can try for getting a lower interest rate. We will look at the factors that the lenders consider when calculating the interest rate they will charge you to help you improve on those points for the best car loan deals. 

What Is The Average Car Loan Interest Rate In Canada?

Albert Einstein quotes, “Compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn’t… pays it.” Let us benign by helping you understand the average interest rate for car loans in Canada in 2023 so that you can make the most of it. The average rate of interest currently is 5.23% and this value ranges between 3% to 7% for the average borrower depending on certain other factors. This is not a fixed value and people who have an excellent credit record could be paying a lower interest charge while those with comparatively lower credit scores would be paying an interest rate much higher. The average car loan interest rate will help you get an insight into what you will be paying when you borrow a car loan. 

What Are The Factors That Affect Interest Rates On Car Loans?

We have looked at the average car loan interest rates but how do lenders calculate the interest rate, particularly for your loan? Let us take a look at the factors that affect your interest rate when you borrow a car loan in Canada.

Credit Score

The credit score and past payment history of the borrower are considered the most important factors when the interest rates for a car loan are determined. The higher your credit scores are the more your chances of getting a below-average car loan interest rate. Your credit scores are a reflection of your credit report and help your lender in judging your creditworthiness. 

Debt-To-Income Ratio

The debt-to-income (DTI) ratio of the borrower is the calculation that helps the lender determine your capability of repaying the loan amount that you are borrowing. A DTI ratio below 50% is considered a good percentage for getting a loan. 

Car Loan Term

The duration for which a loan is given to the borrower or the time period stipulated by the lender within which the borrower has to repay the entire loan amount also helps determine the interest rates. The longer the duration of the loan, the lower each monthly payment on the loan will be. 

Age And Type Of Car

Another major factor that helps the lender determine whether your interest rates will be above or below the average car loan interest rate in Canada is the status of your vehicle. This includes how old your vehicle is, what is the make and model of the car, and other features of the car that is being purchased on this loan. 

Down Payment

A down payment is one of the specific factors that are considered when you are borrowing a car loan. The amount you pay upfront to the dealer impacts the interest rate that you pay. The higher your down payment is the lower your overall loan amount is. 

Whether You Are Buying A New Or A Used Car

The average interest rate for car loans also depends on whether you are buying a brand-new car or a used car. Generally, the interest rates are higher for a new car but you can also get a 0% financing option from some dealerships. 

Car Loan Characteristics

The average car loan interest rate in Canada will also depend on the type of loan you borrow and the various other characteristics of your car loan. Let us take a look at these characteristics in detail. 

Fixed Or Variable Rates Of Interest

Variable-rate car loans are loans where the interest rates change with the prime lending rates throughout the term of your loan. On the other hand, fixed-rate loans offer the same interest rate throughout the term of your loan and your monthly payments remain the same. 

The Term Length Of the Loan

The term length is the total time that has been stipulated by your lender for repaying the loan. In Canada, car loan terms range between 4 to 7 years. The catch here is that the longer your term length is the lower your monthly payment will be but you will also end up paying a bigger amount as interest rates on your car loan. 

The Loan Amount That You Have Borrowed

You must be aware that there is a limit on the maximum amount that you can borrow as a loan from your lender. What you also need to note is that there is also a limit on the minimum amount that you are allowed to borrow as a car loan. The Mount you borrow will automatically influence the interest rates.

The Amount You Deposit As Down Payment

A down payment is a portion of the total cost of the car that you pay upfront to the dealer at the time of the purchase of your car. In general, the down payment requirement of most lenders is about 10% of the cost of your car but you are always welcome to pay a bigger amount. The higher your down payment is the lower your loan amount will go which brings down the interest you pay on your car loan and your monthly payments. 

How Can You Get Better Car Loan Interest Rates Canada?

How can you improve your chances of getting an average or below-average interest rate for car loans in Canada? Following these few easy tips will help.

  • Check your credit score and improve the same before you apply for a car loan.
  • Compare the interest rates and loan terms that are offered by different lenders for a car loan. 
  • Get pre-approved by multiple lenders before you find the option that suits you the best. 
  • Consider depositing a bigger down payment
  • Be willing to negotiate the interest rate with your lender or bank. 
  • Apply for your car loan with a co-signer. 


The interest loan charged on a car loan is one of the most important aspects of the loan. Knowing the average car loan interest rate will help you identify whether or not you are paying below-average interest charges. To improve your situation and get lower interest rates on your loan, you must know the factors that influence your interest rates and work towards improving the same. In the previous sections, we have shared with you all the required details about interest rates on a car loan to help you get the best offers from your lender when you buy a car on a loan. Following the tips shared here, you can get the best interest rates on your car loan online or from your bank. Lower interest rates on your loan would also result in lower monthly installments and paying less for the overall term of your loan. 


What affects interest rates on car loans?

The interest rate on a car loan is affected by the creditworthiness of the borrower, the features and characteristics of the loan, and the type of car. 

What are the 3 factors that could affect the interest rate?

The 3 factors that affect your car loan interest rate are:

  • The term of your car loan
  • The duration you have been using the credit for
  • The make and model of your car

What are the 3 factors that affect your monthly payment on your car loan?

The 3 major factors that affect your monthly payment on a car loan are:

  • The amount you borrow
  • The interest rate charged by the lender 
  • The term of the car loan

How do you factor interest on a car loan?

The following factors help you calculate the interest rate on a car loan:

  • Credit scores
  • Income
  • Loan term
  • Type of interest rate
  • Type of vehicle
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