Get ready for yet another unpleasant surprise if you’re in the market for a new car this winter.
Canadians have dealt with elevated vehicle prices and navigated unusually barren dealership lots over the past couple of years, but now car shoppers must face sharp interest-rate increases too. If you’re planning to lease or finance a car, brace yourself for higher monthly payments.
“Car payments have increased notably as a result of both the transaction price of vehicles going up due to supply shortages, and interest rate hikes,” said Andrew King, managing partner of DesRosiers Automotive Consultants in Richmond Hill, Ont.
In October, the Bank of Canada raised its benchmark interest rate to 3.75 per cent, which meant the rates on new loans for all kinds of purchases – from houses to sports cars and SUVs – went up too.
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According to the latest data from Statistics Canada, the average interest rate across all types of auto loans – leases and finances on new and used vehicles – rose to 6.79 per cent in August, up from 4.79 per cent at the same time last year.
Instead of interest rates, however, you’ll often see the APR (annual percentage rate) advertised alongside cars. The APR is the true annual cost of borrowing money, expressed as a percentage. It includes interest, plus any other fees and costs associated with a loan from the dealer or its financing arm. The actual APR buyers are offered depends on factors that include the size of the loan, the length of the term, the down payment, the customer’s credit rating, whether the buyer is financing or leasing, and the terms of the lender.
Unsurprisingly, APRs are on the rise too. As of October, 2021, the average APR on financed new vehicles was just under 3 per cent, according to market research firm J.D. Power. As of October this year, it had risen to 5 per cent.
On loans with seven and eight-year terms – which combined account for 55 per cent of all new-vehicle finance deals in Canada – the average APR jumped to 5.7 per cent in October from 3.4 per cent in October 2021, and 2.6 per cent in October 2020, according to the company’s data.
To put it another way, borrowing $35,000 to buy a car over seven years could now cost $7,528, whereas last year it would have cost $4,379, a difference of $3,149.
New vehicle prices have risen by about 7.8 per cent this year over last, reflecting both higher sticker prices and higher interest rates, King said. That translates into increased monthly payments of approximately $50 a month and will also increase the proportion of consumers opting for longer borrowing terms, he said.
Say you wanted to finance a new Ford F-150 pickup over 84 months or seven years. As of this time last year, the average monthly payment would have been about $900, according to data from J.D. Power. Now, the payment is $970, which adds $5,880 to the total cost of the vehicle.
“In the full-size pickup segment, you’re probably going to be looking at payments of $1,000 per month, maybe by the second quarter of next year,” predicted Robert Karwel, senior manager of J.D. Power’s Power Information Network, which provides point-of-sale transaction data to dealers.
The increase in payments on Toyota’s popular RAV4 SUV haven’t been quite as sharp, J.D. Power data show. On an 84-month term, average monthly payments are about $590, up $20 a month compared with this time last year. That’ll cost you an extra $1,680 by the time it’s all paid off.
“We haven’t seen the full impact of sudden interest rate hikes yet – and we’ve seen the Bank of Canada take some heavy hikes this year – so we’re still bracing for that,” Karwel said. For now at least, car manufacturers are absorbing some of the increases, he explained, rather than passing the full cost on to consumers. “The [manufacturers] can’t pass on all of it, because it’s moved too far, too fast.”
As a result, shoppers could see even higher APRs over the coming months.