If you have a bad credit score, it can significantly impact the amount of interest you pay on a car loan in Canada. Your credit score is a reflection of your creditworthiness and financial stability, and lenders use it to determine the risk of lending you money. If you have a low credit score, lenders may perceive you as a higher risk borrower and charge you a higher interest rate to compensate for the risk. This can result in you paying significantly more in interest on your car loan.
So, just how much more interest will you pay on your car loan if you have a bad credit score? It depends on various factors, including the type of loan you are applying for, the lender you are borrowing from, and the specific terms of the loan. Here’s what you need to know.
Factors That Affect the Amount of Interest You Pay on a Car Loan
There are several factors that can affect the amount of interest you pay on a car loan, including:
- Credit Score: As mentioned above, your credit score is a major factor that lenders consider when determining the interest rate on your car loan. If you have a low credit score, you may be charged a higher interest rate, resulting in you paying more in interest on your loan.
- Loan Term: The length of your loan can also impact the amount of interest you pay. Generally, the longer the loan term, the lower the monthly payments, but the more you will pay in total interest. For example, if you have a five-year loan with a 10% interest rate, you will pay more in interest than if you had a three-year loan with the same interest rate.
- Type of Loan: There are different types of car loans available, and the type of loan you choose can impact the amount of interest you pay. For example, a secured loan, such as a car loan, typically has a lower interest rate than an unsecured loan, such as a personal loan. This is because the lender has collateral (the car) to secure the loan, which reduces the risk of default.
- Lender: Different lenders may offer different interest rates on car loans, so it’s important to shop around and compare rates from multiple lenders to find the best deal. Lenders may also have different requirements for credit scores, so if you have a low credit score, you may have better luck finding a lender who is willing to work with you.
- Other Factors: There are other factors that can impact the interest rate on your car loan, such as the make and model of the car, the down payment, and any incentives or discounts offered by the lender.
How Much More Interest Will You Pay on a Car Loan with a Bad Credit Score?
Now that we’ve established that having a bad credit score will likely result in a higher APR on your car loan, let’s talk about how much more interest you can expect to pay.
Again, the exact amount will depend on various factors, including the lender you choose, the type of car loan you get, and the specifics of your credit history. However, we can provide some general estimates based on national averages.
According to data from the Federal Reserve, the average APR for a new car loan for someone with a credit score of 720 or higher (considered a “prime” credit score) was 4.21% in January 2021. For someone with a credit score of 690-719 (considered a “near prime” credit score), the average APR was 5.07%. And for someone with a credit score of 620-689 (considered a “subprime” credit score), the average APR was 10.62%.
These figures show that someone with a subprime credit score can expect to pay almost 6% more in interest on their car loan than someone with a near prime credit score and more than 6% more than someone with a prime credit score.
To give you a more concrete example, let’s say you’re borrowing $20,000 for a new car and you have a credit score of 720 or higher. At an APR of 4.21%, you’ll pay a total of $23,912 in interest over a 5-year loan period (assuming a fixed interest rate and monthly payments). If your credit score is 690-719, you’ll pay a total of $26,320 in interest at an APR of 5.07%. And if your credit score is 620-689
Are There Any Risks to Getting a Pre-Approval?
One potential risk of getting a pre-approval is that it can lead to overspending. It’s easy to get caught up in the excitement of car shopping and end up.
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