Bank of Canada hikes rate to 2.5%. Here’s what it means for car buyers

Bank of Canada

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The Bank of Canada’s decision to raise its benchmark interest rate will ripple effect across all industries and sectors. This is the fourth time the bank has increased rates since 2017, and it is expected that further increases will follow. 

In response to the Bank of Canada’s rate increase, two of Canada’s big banks have already moved their benchmark rates. Royal Bank and TD have raised their prime lending rates from 3.7 percent to 4.7 percent. 

 The other major lenders are expected to follow suit shortly.

The Bank of Canada’s primary tool for adjusting the economic growth rate is monetary policy. By changing the overnight rate, the bank influences short-term interest rates affecting borrowing costs and financial conditions. 

A lower interest rate boosts spending by households and businesses, while a higher interest rate slows growth. As a result, the bank uses monetary policy to help keep inflation low and stable. 

In response to COVID-19, the bank lowered its policy rate twice in March 2020, bringing it to a record low of 0.25%. 

The Bank of Canada has since raised the rate three times as part of an aggressive campaign to fight inflation, which has risen to its highest level in 40 years.

Bank of Canada
Source Bloomberg

So how will this recent interest rate hike affect you?

If you’re in the market for a new car, truck or SUV, it’s important to understand how this will impact your monthly payments. Here’s what you need to know:

  • The interest rate hike will result in higher monthly payments for those with variable-rate loans.
  • Longer terms loans will be affected more than shorter-term loans.
  • With a low credit score may be harder to get auto finance approved

When considering buying a new or used vehicle, it’s important to factor in the impact of the interest rate hike when budgeting for your purchase. Speak with your financial institution and the automotive dealership to understand how this will affect your bottom line.

Should you finance a car now?

The Bank of Canada’s prime rate is one of the main factors that auto manufacturers consider when setting the interest rates of new vehicles. This rate generally changes at the beginning of each month. 

Bank of Canada
Car financing

So if you’re in the market for a new car, now might be a good time to take advantage of lower interest rates and lock in some savings. 

However, it’s important to consider all of your options before making a decision. For example, suppose you wait to purchase your car later in the year. In that case, manufacturers’ rebates can also save you a significant amount of money, and these rebates are often substantial when interest rates go up. 

Ultimately, deciding when to buy a new car is up to you and your financial situation. But if you compare all your options and research, you’re sure to find the perfect vehicle at the ideal price.

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