How Auto Finance Interest Rates Work

Red balloons with percentage signs

Written by Centennial Credit

Dec 9, 2020

Rates Are Always Changing

Auto finance terms and interest rates are always changing. The banks update their rates at the beginning of each month to reflect the current economic climate. Manufacturers also follow this practice, updating their rates and incentives at the beginning of each month.

If you’re shopping for a new car and it’s near the end of the month and your salesperson tells you that you need to make a decision before the end of the month, this is why. They simply just don’t know what the rates and incentives will be the following month and it may change the deal you’ve been working hard to negotiate.

Subvented interest rates are the 0% offers you see from manufacturers on new cars only. They adjust these rates up and down at will depending on a variety of factors.

Again, if your salesperson is ‘rushing’ you near the end of the month, it’s because they can’t predict the future and do not want your deal to get worse because of an adjustment in interest rates.

Current Prime Rates

The average person buys a new car every 4 – 5 years (some more, some less). Combine this with ever-changing interest rates and that means that the rate you got when you bought your last car might not be attainable for your next car.

For example, if you financed a used car 5 years ago (in 2014), you may have enjoyed an interest rate of 3.99% or 4.99%. As of the writing of this article (2019) the current prime rate in Canada is at 3.95%. We all know that the banks don’t work for free. You can see how in today’s climate it’s impossible to get that 3.99% you enjoyed on your last car.

The average prime bank rates for car loans right now are between 5.75% and 7% through any dealership. It is different financing through a bank vs. financing through a dealership.

The Dealership vs Your Bank

Dealers belong to a dealer network and are able to access discounted rates from banks for car loans. Sometimes a Credit Union will be able to beat the rate offered at a dealership, but usually they’re very similar or even slightly higher.

If you walked into a Scotiabank branch today and asked for a car loan, regardless of your credit, you would be quoted somewhere from 8-10%. That same car loan financed through Scotiabank, but using a dealership would be in the aforementioned 5.75-7%.

Banks want dealerships, rather than their branch employees writing car loans. This is because the banks would rather focus on more profitable products like mortgages and lines of credit. A dealership could write anywhere from a few hundred to a few thousand car loans per year. This saves the bank branches a ton of time and energy that can be invested elsewhere.

Typically, the only way a bank branch can beat a dealer interest rate is by offering a line of credit to their customers instead. While it might seem like a good idea on paper because the interest rate is a little bit lower, in a future article we’ll discuss while it’s not a good idea to finance a car using a line of credit and how it can actually cost you MORE over the term.

Subprime Rates

Subprime rates are higher interest rates that banks offer to customers with blemishes on their credit bureau. 

These blemishes may come in the form of:

  • Late payments
  • Written off credit accounts
  • Over limit balances on credit cards or lines of credit
  • Consumer proposals
  • Bankruptcies
  • Collections
  • Judgements
  • Repossessions
  • And more..

Currently, subprime car loan rates can fall into a very wide range: from around 8% all the way up to as high as 30% depending on the application.

Because these loans come at a higher rate, banks agree to take on more risk. This is how you can go through a bankruptcy and still get a new car – you just have to pay a higher interest rate.

If you find yourself in a subprime loan (with a high interest rate) you typically need to stay in that loan for 1.5 – 2 years with a good payment history before you can expect to obtain a better rate. 

The only way to change the interest rate on a loan is to pay out that loan and set up a new one. Loans cannot be modified from their original terms once they are created. This means that you would have to trade in your car for another one in order to get a better interest rate.

It’s important to weigh the options if you are considering doing this. The depreciation of your car (and loss of trade-in value) may be greater than the interest you pay over the remainder of the loan term.

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