Why is your car loan at a 14-15% interest rate? | Edmonton, Calgary, Red Deer

“What exactly is non-prime credit and why am I paying 14-15% or even higher on my vehicle loan? Am I getting ripped off?” These are all questions you might be asking yourself when you look at your loan pre-approval or maybe even your own current vehicle loan. Not all of us have a strong knowledge of credit, so here are a few things that will help explain why you might have a high interest rate.

You are not alone, over 30% of Canadians are considered non-prime customers. Non-prime loans are granted to borrowers who have had a small credit hiccup or events in the form of bankruptcy, a previous repossession, major life events that affect the finances, no credit history or even a late payment on a credit card. Life events can come up and it can be challenging.

Not surprisingly, non-prime car loans have higher interest rates to compensate for the higher credit risk. It’s like saying, “we know there have been some past issues, but we are willing to take the chance of lending you money, even with the bruised record of accomplishment”. You are not getting “ripped off”, unfortunately with a challenging credit history, the risk is higher for the lender, therefore a higher interest rate.

Credit rebuilding is possible with consistent repayment and diligence. Ways to be prepared before you enter a non-prime vehicle loan

1. Know your credit score, typically a credit score of less than 620 may sit you in the non-prime sphere.
2. Read your loan contract and understand what your interest rate will be, what your principal is and breakdown of fees. Don’t be afraid to ask questions. If you goal is to trade out in 24 months, make certain this can happen very easy.
3. Be realistic in your vehicle selection. You know your credit and financial history, know your credit budget and what you can afford to pay.
4. Remember, it’s not a home mortgage, managed well you can still effectively pay down your car loan.