If you’re considering purchasing a car but don’t have the funds to pay for it entirely in cash, you may have considered taking out an auto loan. An auto loan is a standard loan many Canadians consider when they need access to money to fund a car purchase. According to Finder’s Consumer Sentiment Tracker Q1 2023 report, more than 12 percent of Canadians planned to take out a car loan in the first few months of 2023.

Car loans can be financial tools, but understanding the intricacies of car loans is crucial for anyone considering purchasing a vehicle. One key aspect that demands attention is the interest rate associated with car loans. Car loan interest rates in Canada significantly determine the overall cost of financing and can impact your monthly payments.

At FlexMoney, we ensure that our customers are aware of different loan solutions in Canada and their associated costs. You can opt for a car loan or FlexMoney loan to fund your purchase. Either way, it’s essential to understand the basics of car loans, explore how interest works, and learn how to calculate and manage car loan interest rates.

Car Loan Basics

Before we dive into the nitty-gritty of interest rates, it’s essential to have a solid grasp of the basics.

Loan Types

Car loans come in various types, including simple interest loans, pre-computed interest loans, and variable-rate loans. Before applying for a loan, understanding car loans and the nuances of each type can help borrowers choose the one that aligns with their financial goals.

Loan-to-Value (LTV) Ratio

Lenders often consider the LTV ratio, which is the ratio of the loan amount to the car’s value. A lower LTV ratio may produce a more favourable car loan interest rate.

Secured vs. Unsecured Loans

Car loans are typically secured by the vehicle itself. Understanding the implications of secured and unsecured loans is crucial, as unsecured loans might have higher interest rates.

Additional Fees

Borrowers should be aware of any additional fees associated with the loan, such as origination fees, documentation fees, or prepayment penalties. Unfortunately, some lenders may not be transparent about their fees, which can lead to unexpected hidden costs.

As a licensed lender in Canada, FlexMoney understands the need for transparency. So, we ensure that our customers know their interest rate and any additional fees that may come up in the future. This ensures you don’t have to deal with surprise fees that affect your financial health.

Loan Repayment Options

Lenders may offer varying repayment options, including monthly, bi-weekly, or accelerated payment plans. Choosing the right repayment frequency can impact the overall interest paid.

How Does Interest Work on a Car Loan?

One of the first things you need to know when dealing with car loans is how car loan interest works. Interest is essentially the cost of borrowing money. When you take out a car loan, the lender charges you interest as compensation for allowing you to use their funds. The interest is expressed as a percentage of the loan amount and is added to the principal (the original loan amount) to determine the total amount owed.

Getting familiar with car loan interest rates is crucial during borrowing, enabling you to make informed financial decisions.

Car loans in Canada commonly have compound interest, calculated on the outstanding balance, including the principal and accrued interest.

How to Calculate Car Loan Interest?

To get the answer to the question of how interest is calculated on a car loan, it’s essential that you get familiar with its key components. Understanding car loan interest rates and how to calculate them empowers borrowers to make informed financial decisions. The formula for calculating car loan interest involves three key components:

  • Principal: The original amount borrowed.
  • Interest Rate: The annual percentage rate (APR) the lender charges.
  • Time: The duration of the loan in years.

The Car Loan Interest Formula

The formula to calculate car loan interest is:

Interest = Principal × Interest Rate × Time

Car loans are typically expressed in monthly terms, and during that calculation, you need to adjust the formula to the following:

Interest = Principal × Interest Rate × (Loan Term in Months/12)

Average Car Loan Interest Rate in Canada

According to Statistics Canada, the typical interest rate for an auto loan in Canada was around 7.25 percent as of March 2023.

However, car loan interest rates in Canada can vary based on factors such as credit score, loan term, and the lender’s policies. It’s crucial to stay updated on current market trends and consult with financial institutions to get the most accurate information.

Factors That Affect Your Car Loan Interest Rate

Several factors influence your interest rate on a car loan, including the following.

Employment and Income Stability

Lenders often assess the stability of a borrower’s employment and income to determine car loan interest rates. A steady job and reliable income can positively influence the interest rate offered.

Loan Amount

The amount you borrow can influence the interest rate. Larger loan amounts might come with higher rates, while smaller loans could qualify for more favourable terms.

Whether you get a used or new car can also influence the loan amount you will need. For example, used car loan interest rates in Canada may be lower, as a used car is likely cheaper. This means you will need to borrow a lower amount to fund your purchase.

Debt-to-Income Ratio (DTI)

Some lenders consider the borrower’s DTI the ratio of monthly debt payments to monthly income. A lower DTI indicates better financial health and may result in lower car loan interest rates.

But this requirement can vary from lender to lender. When you borrow with FlexMoney, you don’t have to worry about your DTI. To qualify for a FlexMoney Loan, you have to meet the minimum eligibility criteria outlined on our website. We keep our application process simple to ensure borrowers don’t have to fill out lengthy paperwork or submit documentation to qualify for a loan when they need quick access to cash.

Credit History

A borrower’s credit history is significant when seeking a car loan. Those with excellent credit scores typically receive lower interest rates, while lower credit scores may result in higher rates or difficulty securing a loan.

However, you can still take the time to explore the best online loans available to you, regardless of your credit history. Some lenders prioritize credit history, while others focus on other factors.

Down Payment Percentage

You can increase your chances of being approved with the down payment you choose to make. Making a substantial down payment can demonstrate financial responsibility and may lead to a lower interest rate. Lenders often reward larger down payments with better terms.

Making a larger down payment may be easier when you buy a used car since the vehicle will likely be cheaper than a brand-new one. The best way to determine your costs is by consulting your lender to compare new vs used car loan interest rates in Canada.

Car Loan Alternatives to Consider

In addition to traditional car loans, there are some alternative financing options you may want to consider exploring.

Personal Loan

You may want to get a personal loan to finance a car, as it provides flexibility in how the funds are used. While interest rates may be higher than secured car loans, individuals who prefer an unsecured option or need funds for various purposes may find personal loans suitable.

Although a personal loan is a viable borrowing option, some myths about personal loans make it challenging for people to determine the best loan for their needs. At FlexMoney, we aim to separate myths from facts to ensure you know all about different types of loans. This includes factual information about car loan interest rates in Ontario and many other provinces.

Dealership Financing

Some dealerships in Canada offer in-house financing options. While this option is convenient, borrowers should carefully compare these rates with other lenders to ensure competitive terms. Consider comparing car loan interest rates in Ontario with other provinces or rates within the same city at different dealerships.


After securing a car loan, borrowers can explore refinancing options if interest rates decrease or their credit score improves. Refinancing can lead to lower monthly payments or reduced interest costs.

Peer-to-Peer Lending

Online platforms connect borrowers with individual lenders, potentially offering more flexible terms and favourable car loan interest loans in Ontario, British Columbia, and other provinces. However, interest rates may vary, and thorough research is essential.

Home Equity Loans

For homeowners, using home equity to secure a loan might result in lower car loan interest rates. However, this option poses the risk of losing one’s home if payments are not met, so experts typically recommend avoiding this option. But in some cases, you may need to choose this option, during which it’s essential that you do your research and confirm your repayment abilities before considering this option.

Balloon Payments

Some lenders offer loans with smaller monthly payments but a larger “balloon” payment due at the end of the term. This option can suit those expecting a lump sum payment in the future.


Car loan interest rates in Canada are a pivotal aspect of vehicle financing, significantly impacting the overall cost of ownership. Understanding how new and used car loan interest rates in Canada work, calculating them, and being aware of the factors influencing rates can empower borrowers to make informed decisions.

Whether you opt for a traditional car loan or explore alternative financing methods, carefully considering your financial situation is key to making educated decisions. FlexMoney offers a flexible financial solution catered toward various needs. But it’s vital that you stay informed, compare offers, and choose the option that aligns with your budget and long-term financial goals.