How do lenders determine my interest rate?
While your credit profile is the most major factor that determines your interest rate, there are also other major factors that all banks in canada use when determining the interest rate in specific auto loans. Lenders don’t just rely on your credit score when they decide your interest rate. There are multiple factors that play a role in your interest rate, below are four main points lenders take into account when setting the interest rate for your car loan:
Canadian’s with higher scores typically have access to the lowest rates, maintaining a healthy credit profile is a critical component on getting the lowest rate possible for your Auto Loan. See our Credit section for Credit Tips, Statistics and Additional Information.
Your Monthly Income
All Banks consider your monthly income because it determines what you can afford and your likelihood of making your payments on time. A typical rule lenders use is they never want your monthly car payments to exceed 18% of your total monthly income. For example, if you make $5000 Gross Monthly Income, if you attempted to apply for an auto loan and the payment was $1.00 higher than $900.00 per month, there is a good change the banks approval system would auto-decline the application. Always make sure to disclose your Gross Monthly Income (Before Tax & Deductions) and not your Net Monthly Income. Banks will also match your income to your outstanding debt to determine your debt-to-income ratio to make sure you can afford your loan.
Amortization (Term of the Loan)
The term will have an impact on the interest rate. Typically, the longer terms tend to have higher interest rates. Shorter terms can offer lower interest rates, but will come with higher monthly payments as it’s amortized over less time. We recommend trying to keep your term around 60 Months (5 Years) if possible.
The vehicle's year, make, model and kms will directly impact the interest rate. Banks will determine what program the specific vehicle is eligible for. Year and Kms being the most important factors. Most lenders will not finance a vehicle that is 7 Model Years old or older. While your credit will determine your credit tier , the vehicles’s VIN will also be required to determine the exact program for that vehicle.