Explain the Bank of Canada policy interest rate used for car loans?

The Bank of Canada's policy interest rate, hypothetically at 2.75% as of July 30, 2025, is the foundational benchmark for all lending within the Canadian financial system, even though it isn't the direct rate applied to car loans. This 'overnight rate' is the target for the interest rate at which major Canadian financial institutions borrow and lend funds to each other for one-day terms, effectively setting the base cost of short-term capital across the country.

When the BoC adjusts this rate, it directly influences the prime lending rates offered by commercial banks and credit unions throughout Canada, as well as the overall funding costs for all auto lenders, including captive finance companies. These institutions must then adjust their own lending rates to maintain profitability and manage risk, passing on these increased or decreased costs.

For Canadian consumers, this mechanism is critically important because a higher BoC policy rate translates directly into increased borrowing costs for auto lenders, which are then invariably passed on as higher Annual Percentage Rates (APRs) for both new and used car loans. This directly impacts monthly payments, the total interest paid over the loan term, and ultimately, the overall affordability of vehicles in the Canadian market, influencing purchasing decisions and consumer spending patterns across all provinces.