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Do bigger car loans have higher interest rates?

With the popularity of longer-term payback rates for car loans on the rise, Canadians are becoming more likely to buy cars out of their price range, according to research from the Financial Consumer Agency of Canada (FCAC). The question is, do these larger loans affect the amount of interest a borrower has to pay?

For the most part, car loans use a type of interest called simple interest. This means that the interest charge is determined on the amount owed on the loan. Simple interest, unlike compound interest, does not focus on the accumulated interest or charge “interest on interest”, and so its thought  to save the borrower money in the long run. Instead of paying equal amounts of interest as they pay back the loan, borrowers ends up paying more interest at the beginning than the end.

However, this rate tends not to be determined by the amount of money borrowed, and is determined on a borrower-to-borrower basis as the result of an accumulation of factors:

1.Financial history

Much like anything to do with finance, your credit score will play a significant role in determining how much interest you are charged as part of your loan repayments. Your lender will assess your credit history and any past loan repayments to determine how much they will charge you. As you can imagine, the better your credit score is, the better your interest rates will be.

2.Age and Value of the vehicle

Now, you might think that if you’re hoping for a loan on a new, flashy car, that your interest rate will be higher, however surprisingly this is not the case. New cars are considered more lucrative to lenders, and thus they want you to buy them. Although counterintuitive, lenders are more likely to offer you a better interest rate on newer models to encourage people to buy then. Older cars are less attractive to lenders and so they tend to charge a higher interest rate on loans. Do your research and find out the exact age of your car before you decide to invest, particularly if you are buying it second hand.

3.Length of repayment

Although longer repayment periods seem to be growing in popularity, this tends to have a negative impact on interest rates. In reality, the shorter the loan term is, the lower your interest rate will be. However, be aware that a shorter loan term will result in higher monthly repayments, so it is important that you have enough funds.

4.Size of downpayment

Larger down payments are considered less of a risk by loan providers, and as a result you will probably see a lower interest rate.


If you’re taking out a loan and do want to lower your interest rate, there are a few tricks that you can use:

1.Get a Co-Signer

Having a co-signer for your car loan does not always guarantee a lower interest rate, but it is definitely helpful. A cosigner is someone you know, usually with a good credit score and full credit history, that agrees to pay your debt in the event that you can not. Having a co-signer also improves your chances of being approved for a larger loan.

2.Shop around

Different providers will have different requirements in order to grant a loan, so it is always best to do your research and compare different providers to find the right one for you.Maintain a good credit score

3.Maintain a good credit score

Your credit score is vital in maintaining good financial health, and can help you out when it comes to all kinds of things. So, of course, your credit score is important when taking out a loan. You should always aim to make credit repayments on time, and having a lengthy credit history can be a bonus. If your score isn’t looking so great, it can be improved in as little as three months, by paying off all existing debts or raising your credit limits-just make sure you are wise about it.

4.Pay off your loan early

Since car loans tend to use simple interest, your monthly interest charge is based on how much you still owe on your loan. One way to combat this is to make early repayments that will bring down your loan balance. If you do decide to pay off some of your loan in advance, make sure you can afford to, so that it doesn’t hinder your credit history later down the line.