One of the most common concerns when looking to take out a car loan, or any loan, is the interest rate you will be charged on your repayments.
This single number will largely determine how much you have to pay every month, how long you will have to pay for, and how much extra you are paying the lender on top of the actual cost of your car.
Many lenders will be deliberately vague about how much they charge from the outset, preferring to get you hooked on the idea of the loan and then surprise you with an excessively high interest rate.
There are also differences to consider between the rates available to people with good credit and bad credit. Naturally there is some incentive to have good credit when it comes to the kinds of rates you will be offered, but having bad credit doesn’t have to mean you are paying through the nose for your car loan.
So how much can interest is charged on average on a bad credit car loan?
What affects a car loan interest rate?
First up, we should understand what are the factors that will determine your interest rate. Whilst each lender and loan will have different criteria attached to it, here are some broadly applicable factors that will come into play when your interest rate is calculated.
The overall state of the local economy will play some role in how much your lender charges you in interest on your car loan.
The Bank of Canada is the official government body that determines monetary policy, and their decisions regarding interest rates are generally taken up by all credit lenders, whether that is an increase or decrease of interest rates.
If the economy is doing well, the Bank of Canada will typically raise interest rates to make saving a more attractive option. Conversely, when the economy is slowing down, they will lower interest rates to encourage spending and help boost businesses.
Thus, depending on whether the economy is currently experiencing a boom or a recession will likely play a role in your interest rates.
Obviously the lender you choose to go with will play a big role in your final interest rate as well.
There are lenders that specialize in car loans specifically and so are able to leverage years of experience and business relationships to offer more competitive rates. There are lenders that favour only good credit score applicants and will either reject or offer an excessively high rate to bad credit applicants.
And then there are car loan brokers that focus exclusively on bad credit car loans, such as HamiltonBadCreditCarLoans.ca. Much like a good mortgage broker, our team is dedicated to getting the best interest rates possible on every one of our loans, and we only negotiate with Canada’s leading banks and credit unions. If you have subprime credit, your best bet will be to go with a car lender that specializes in bad credit car loans.
The type of car you choose for your loan will also directly impact your interest rate.
Typically a new car will attract the lowest interest rates, as they have not been driven before and will have a greater resale value. Conversely, used cars usually attract higher interest rates as they will not be worth as much once it comes time to sell them.
Whether or not you put down any money in the principle loan and if so how much will often affect your interest rate as well.
The more money you initially invest into the car, the less money you will ultimately pay over the length of the loan, as you are borrowing less overall from your credit provider. Having a sizeable downpayment is also a positive sign to your lender, as it shows you are fiscally responsible enough to have saved up a chunk of change. This will encourage them to offer you a better interest rate as you will appear to be at a lower risk of defaulting on your loan.
The Loan Term
The length of time you choose to repay the loan over will also impact your interest rate.
A typical car loan has a term length of 72 months. However, if you are able to ask for a shorter term and can afford the higher monthly repayments, paying back your loan faster will often come with interest rate deductions. As lenders will make their money back off you faster, they may be amenable to offering you a lower interest rate, which will help you save money in the long run.
Your Credit Score
Finally, the most important factor that influences your car loan interest rate is your credit score.
Credit scores are used by lenders to determine your overall credit trustworthiness, and whether granting you credit would be a risky decision based on your past repayment history. A good credit score is usually anything above 620, whilst a bad credit score is in the 300 to 500 range.
People with good credit will be offered better rates than people with poor credit, as they are seen as lower risk investments and are considered likely to repay their loans on time and in full. This is the entire incentive around credit scores and without the reward of getting lower interest rates, no one would really care about what their score was.
Average Interest Rates
So, now that we know what factors influence interest rates when it comes to car loans, what do average rates look like in the real world?
Good Credit Car Loans
First we will look at the kinds of rates a person with a good credit score could expect to receive.
The specific numbers will depend on all of the factors listed in the previous section, but generally someone with an excellent credit score could expect an interest rate in the 3 to 7 percent range.
This again comes down to the reason why everyone cares what their credit score is and why they try to improve or maintain it. When you have an excellent credit score, you are able to negotiate better interest rates and thus pay less for any type of credit you take out.
Bad Credit Car Loans
Now for those of us with a less than ideal credit score, typically anywhere below 550.
Bad credit car loans tend to have an average interest rate of 16 percent. Whilst this may seem a lot higher than someone with a good credit score, that is simply the credit provider’s way of protecting themselves from any possible defaults, and is also the flip side of the coin when it comes to the reason anyone wants to have a good credit score.
Having a bad credit score means you will have to pay more for any credit you take out, but you should make sure you are not being taken advantage of and do your homework when shopping around for a bad credit car loan.
Rebuild Your Credit
One of the advantages of taking out a bad credit car loan is the ability to actually improve your credit score.
Even though you will have a higher interest rate, making regular, on-time repayments on your car loan will show up on your credit history. The credit bureaus will make note of this, and you will notice your credit score steadily increasing as a result.
This means that when you apply for credit in the future, you will have a higher chance of being offered the better interest rates and eventually you’ll make it into that coveted “excellent credit score” range.
Are you looking for a way to rebuild your credit whilst still getting into a car you love? Contact HamiltonBadCreditCarLoans.ca today and see what we can do for you!