Understanding Canadian Car Loans from A-Z

Written by Sean Cooper

Are you planning to purchase a vehicle? Unless you can afford to pay for it in cash, you’ll have to borrow the money. And there are a lot of factors to consider when choosing a car loan: should you finance or lease? What interest rate can you get? How long will you take to pay the loan back?

Everyone’s circumstance is different, and one car loan might be a perfect fit for your neighbour but not for you. Let’s take a look at the car loans Canada offers to see if we can simplify what might otherwise be an overwhelming landscape of info.

Car Loans – The Basics

A car loan is a personal loan in which a lender loans a borrower the funds needed to buy a car. In exchange, the borrower agrees to repay the lender the loan amount with interest, typically in monthly payments, until the loan is fully paid off. There are a few key concepts that are important to understand if you’re considering a car loan.

Principal

Principal is the total sale price of the car, and the amount you borrow. This includes any fees for the lender or dealership and any add-ons or options you may select.

Interest Rate

The interest rate is the percentage the lender charges the borrower on the money loaned. The rate given by a lender can depend on several factors, including: the lender’s prime rate; the borrower’s credit score; and the vehicle’s make and model. If you have an excellent credit score and earn a decent wage, you’ll typically qualify for the best (prime) interest rate on a car loan.

Term

The term is the period of time in which the car loan is to be repaid. Car loan lengths are typically between two and eight years. Longer car loans in Canada have the advantage of lower monthly payments, but can lead to the unfortunate situation where you have negative equity in your vehicle (you still owe money on the vehicle when it’s inoperable). For that reason, you might think twice before taking on a seven or eight-year car loan.

A general rule of thumb is to try to cap it at five years if your cash flow allows. (If you’re confident that you’ll have a steady source of income that you can budget a monthly payment from for the next five years.) If it doesn’t, consider buying a less expensive vehicle, or consider leasing.

Does It Make Sense to Lease, Finance or Buy a Car in Cash?

Why you might lease a car:

  • You prefer to drive a new vehicle: When you lease a vehicle, you’re essentially only renting it. The typical car lease lasts only two to four years. Once the lease is up, you can return the car and start the process all over again by leasing another new vehicle or you can buy out the lease from the dealership if you want to keep the vehicle.
  • Cash (flow) is king: The biggest advantage with leasing is cash flow. When you lease, your monthly payment will be lower than if you take out a car loan to purchase the same vehicle. Unlike a loan, where you borrow the full purchase price of the vehicle, with a lease you’re only borrowing the amount that the car will depreciate in value over the period of time of the lease. A vehicle that costs $600 a month with a car loan may only cost $350 a month with a lease.
  • You enjoy driving nice cars: The lower monthly car payment when you lease versus own means that you can afford a nicer make and model of car than you otherwise would be able to if you financed or bought the car.
  • You don’t drive very often: If you mostly use your vehicle for commuting short distances, leasing may make sense. You don’t have to worry about going over the distance limits on your lease and being forced to pay costly overage penalties. Most standard car leases come with a limit of 24,000 kilometres. As long as you stay within the limit, you should be fine.
  • Peace of mind: Since you’re always driving a newer vehicle, you’re less likely to incur costly car repairs since the vehicle is almost always under full warranted. Although note that if you do need car repairs, you may be required to get them done at the lease’s dealership, which may cost you more than taking your car to the neighbourhood auto mechanic.

Why you might finance (take out a loan) a car:

  • You drive long distances:When you finance (or own) a vehicle, you don’t need to worry how often you drive it. If you’re commuting long distances to work and planning to travel a lot, you won’t have to stress about facing penalties you’d incur when leasing. You’re generally better off financing instead of leasing if you plan to drive over 30,000 kilometres a year.
  • You’re in it for the long haul: Unlike a lease, once you pay off a car loan, the vehicle is yours. There are no more monthly payments to deal with. It’s an asset that can be used to make a stronger financial case, for instance, when applying for a mortgage. You can drive it into the ground or trade it in. It’s completely up to you.
  • Freedom of choice: If you’re a car enthusiast, chances are you’ll want to modify your vehicle. If you want to add a custom tailgate, you’re out of luck if you lease. Not so if you took out a car loan, in which you can customize your vehicle to your heart’s content.
  • Building your credit score: There are five factors that make up your credit score. Payment history is the most important factor, accounting for 35% of the score. By steadily paying your car loan over time, it can have an overall positive impact on your credit score.

Why you might buy a car in cash:

  • No monthly payments: If you have the cash, you might consider buying a vehicle outright. When you do, you don’t have any monthly car payments to worry about, which will reduce the mortgage amount you’ll qualify for if you’re planning to buy a home. You also won’t have to worry about going to a lender for financing.
  • Cash incentives: To entice you to pay in cash, the car dealership may offer you cash incentives (i.e. a discount on the car cost) as a sweetener.

How Does a Car Loan Work?

Applying for a Car Loan

You’ll need to complete the lender’s car loan application form, where you’ll provide your basic personal and financial information. You’ll also typically need to submit other documentation, including notices of assessments for two years, your monthly housing cost, the make and model of the vehicle you’re considering purchasing, and any monthly debt obligations you have. A lending specialist will then review your files and crunch the numbers to see if you qualify for the loan. Pre-qualification can be done to see if you can afford the car you want (this can help avoid dinging your credit score). Pre-qualification is just like applying for a car loan, but without pulling your credit report, and therefore avoiding the potential hit to your credit score.

When applying for car loans, you’ll want to limit the number of lenders you apply with, as applying with too many lenders in a short period of time can negatively impact your credit score.

Receiving a Car Loan

The process of receiving the car loan depends on whether your lender is a bank, online lender, or dealership. With a bank or online lender, a lump sum payment is typically deposited into your bank account. You can then use the funds to purchase the vehicle from the dealership. However, if you’re buying the car directly from the dealership, you won’t typically receive a deposit since you’re borrowing the money from the dealership who owns the vehicle. You’ll simply receive the vehicle and will be required to start making your car payments.

Repaying a Car Loan

Car loans have a set repayment schedule depending on the term of the car loan you choose. If you choose a shorter-term loan, your monthly payments will be higher, and if you stretch it out, your monthly payments will be lower (although you’ll pay more in interest over the life of the loan). To keep your credit in good standing, you’ll want to make your car payments on time.

The payments are typically withdrawn by way of preauthorized payment from your bank account. If you come into extra money (such as a tax refund, pay raise, inheritance or bonus at work), you can typically make extra payments above and beyond your regular/minimum car payments. This reduces the term of your car loan, thereby saving you money you would pay in interest.

Payment Terms

A car loan’s payment is usually fixed (stays the same) during the term of the loan. When you make a car payment, similar to a mortgage, a portion of it goes toward interest and a portion goes toward principal. Car loan payments are front-loaded and paid via amortization. As such, you’ll pay the most interest at the beginning of the loan.

How Interest Is Calculated

There are two types of interest calculations on car loans: simple interest and compound interest. With simple interest, interest is only charged on the original amount that you borrowed (the principal). With compound interest, interest is calculated on both the principal plus the interest accrued since the beginning of the loan.

When you sign up for a car loan, you should receive a financial disclosure, which expresses the interest rate as APR (Annual Percentage Rate). This takes into account the total cost of borrowing and includes compounding interest, fees and anything else you may be required to pay. This represents the true overall cost of the car loan.

Credit Score and Credit Report

It’s beneficial to have a high credit score when seeking out a car loan—the higher your credit score, the more likely you are to qualify for the lowest interest rate possible. So I recommend that you review your credit score and credit report before you apply for a loan.

You’ll want to request them from both the major credit reporting bureaus, Equifax and Transunion, since some lenders only report to one credit bureau. If you find that your credit score is on the low side, try to improve it by paying down your credit card balances and other outstanding debts. Keep an eye out for any inaccuracies on your credit report that negatively affect your score. If you see an error, take steps to correct it before applying for the loan.

Make and Model

Decide on the make and model of the vehicle you’d like to purchase. This will give your lender a purchase price so that they can come up with the terms of your loan.

Personal and Financial Information

Your lender will request personal information, such as your full legal name, date of birth and current address. They’ll also want to know about outstanding debts as well as rent or mortgage payments. If you’re putting money down on the vehicle, the lender may request to see proof of your down payment in the form of recent bank statements.

Driver’s License

Your lender may request that you provide photo ID in the form of a driver’s license. Having a driver’s license can help, since borrowers with a driver’s license are typically more likely to pay back car loans.

Employment History and Income

Lenders typically ask for your employment history for the last three years. To ensure you can afford the car loan, your lender will often ask for proof of income, in the form of notices of assessment for the last two years.

Banking Details

Your lender will request a void cheque and may request that you complete a preauthorized payment form to automatically withdraw the car loan payments from your bank account.

Types of Auto Loans

Banks and Credit Unions

When a Canadian bank or credit union approves an auto loan they typically deposit the loan amount directly into the borrower’s bank account. The borrower can then use the funds to pay the car dealership for the vehicle they’d like to purchase. This is often referred to as “direct lending,” since the car loan comes directly from a bank or credit union.

Dealership Financing

As the name implies, dealership financing is when the loan is administered by the dealership selling the vehicle. The biggest advantage of dealership financing is convenience: You can buy the vehicle and finance it at the same time and location. It doesn’t get any easier than that!

Just make sure you take the time to shop around, and be confident that you’re getting a car loan with a reasonable interest rate and favourable terms.

Online Lenders

Fintech (short for financial technology) has made it easier than ever to obtain a car loan. With an online lender, you can apply for a car loan from the comfort of your home. It’s a convenient approach to getting a car loan, as application forms are completed online. And it’s very easy to shop around for the best loan terms possible, which helps borrowers save more money.

Auto Loan Features You Should Pay Attention To

Before you start your search for the best car loan you can find, remember these key factors to keep an eye on:

  • Interest rate: The lower the interest rate on the loan, the less you’ll pay for the car in the long run.
  • Fixed/variable rates: Fixed-interest car loan rates in Canada remain the same for the term of the car loan, while variable rates can fluctuate with a change in the lender’s prime rate. Variable rates offered are typically lower than fixed rates, but you might nonetheless consider going with a fixed rate if your cash flow is tight or you’re risk averse.
  • Simple/compound interest: Simple interest is based on the principal amount of the car loan, while compound is based on the principal + the interest that accumulates during the compounding period.
  • Repayment schedule: If you’re looking to maximum monthly cash flow, you may go with a longer loan term, although the tradeoff is you’ll pay more interest over the life of your loan.
  • Payment frequency: Lenders often let you choose the payment frequency of car loans. Common payment frequencies include weekly, bi-weekly, semi-monthly or monthly payments. In terms of cash flow, it’s easiest if you choose a payment frequency that matches your pay schedule at work.

What to Expect With Poor Credit Auto Loans

When you are looking to buy a car, but you have a history of bad credit, it can seem like your dream is over before it has had a chance to begin. Luckily, there are plenty of options available out there for those who are looking to buy a car but do not have the credit that they wish. One way to do this is with poor credit auto loans. Taking out this type of loan can help you get behind the wheel of the car that you wish in practically no time at all. There are a few things to remember when you are considering this type of financing.

Taking Out the Loan

The first thing that you need to keep in mind is the amount of the loan itself. The size of the loan will be determined by several factors. The price of the car itself can make a huge difference, so if you are looking at a car that is not within your reasonable budget you can expect higher payments over the course of time. The duration of the financing plan will also change what you can expect in payments. The shorter the time frame, the higher the payments. Sit down and create a reasonable financial plan in order to make the best decisions for your poor credit auto loans.

Making the Payments

As with any loans, making consistent payments in a timely fashion is a wise idea. How you make the payments is entirely up to you. When you make larger payments each month, you will be done paying off the car in a much quicker fashion. However, if you can only afford a specific amount each month, it is better to stick with whatever payment you can afford that meets the monthly requirement so you can get your credit in better shape. No matter how you choose to pay back the loan, it is important to stay on top of your game throughout the process so that you do not miss payments or harm your credit in any way.

Your Slow Credit Shouldn’t Affect Your Ability to Drive

Everyone knows what bad credit is and how much it can affect your ability to get anything, be it a new house, new car or anything else that requires a large sum of money and therefore a loan from the bank.

 

However, one term that many people may be unfamiliar with is “slow credit”.  It means exactly what it sounds like; although you do have a history of paying your bills, you also have a history of habitually paying them late.

 

Although this isn’t quite as damaging as a bad credit, a slow credit can often play a part in hindering your ability to get a loan from a bank or loan company.

 

Luckily, there are ways to get slow credit car loans if you are in need of a new car. Unfortunately, many places offering loans to people who are desperate for a solution will use that to take advantage of people and jack up interest rates. These loan sharks will draw you in, and once they have hooked you they will make it so that you struggle to ever get out of debt with them. It is a situation that nobody wants to get into, and it could ultimately end up destroying your credit.

 

That is why it is so important to do your research into a company offering you a loan if you have bad or slow credit. Do a search of their customer reviews and look on their website for affiliations and accreditations before you agree to take a loan from them. Many companies are just trying to help people and give them a second chance when they knew they really need it, such as getting a car to get from point A to point B. A little bit of research will help you find the right ones.

Loan Terms for the Savvy Car Shopper

If you don’t know what you’re looking for when you head out to buy a car, there’s a good chance you’ll end up with either a bad car or a bad loan. Decent car loans definitely exist, but you have to know how the game is played in order to get the terms you want. Before signing off on a loan, make sure you educate yourself on the process and what you can expect to be offered.

Repayment Period

Sometimes a long repayment sounds like a nice way to casually buy, but this can leave you underwater – indebted more to a lender than what your vehicle is worth. You want to pay down the debt as quickly as possible, so shorter terms with no early-repayment fees are usually the best bet.

Total Amount vs. Monthly Payment

If you focus too much on setting the monthly payment, you lose sight of how much you’ll be paying in total. Keep reminding yourself that the goal is to spend as little as possible; you’ll already be spending a good sum of money to get a new vehicle, so you need to make sure you’re not paying too much extra by way of interest and loan servicing fees.

Interest Rate Variables

Your credit score isn’t the only determining factor when it comes to interest rates on car loans. Lenders have just as much interest in your income, driving history and the type of car you’re buying. If you don’t want to get caught off guard and end up with bad terms, you need to think about all these matters before you apply for a loan.

Good car loans make car buying much easier, while bad loans can turn the process into a nightmare. If you want to avoid the latter scenario, turn yourself into a savvy shopper before you start looking for your next car.

How to Buy a Car If You Have Bad Credit


In the auto industry, “bad credit” typically refers to a score of 600 or lower. If your score is less than ideal, you may think that you can’t get a car loan or that you have to lease. However, this is simply not true anymore.

Bad-credit car loans exist to help people just like you. Before you enter in to such a loan, it’s important to understand how your credit can affect your loan and what you can do to get a deal that makes sense for you.

The Myth

Decades ago, there were only a few big banks that did car loans. Back then, if you had bad credit, it was nearly impossible to get a car loan. While times have changed, many people still believe that their credit history will keep them from auto ownership.

The Truth

In contrast to popular belief, a credit score below 600 doesn’t have to stop your car ownership dreams. We have options available for you. However, lenders may require a larger interest rate to finance these loans.

Know Your History

Before you buy a car, check your credit history, not just your score. There may be something on your report that is not accurate. If a piece of your credit report doesn’t reflect what happened, you could end up paying higher interest for no reason. Contact the credit bureau if you see inconsistencies.

Improve Your Score

If your score is rightfully low and you’re working on it, you can still get a car loan now. In fact, making regular payment could help raise that score. You can buy today and refinance when your credit has improved. This option can get you in a car when you need it and still save you money down the road.

A spot of bad luck can hurt your credit score, but that shouldn’t stop you from getting into a new or used car. Ask about your options, and we can help find the right deal for you.

Smart Shopping for Used Cars

Buying a used car can be daunting if you haven’t purchased one before. There are always concerns about the condition of the vehicle, but if you work closely with a reputable dealer specializing in used cars, you can get a dependable vehicle for a great price. Asking the right questions and doing some research is part of the process.

Find a Dependable Make and Model

Kelley Blue Books and online consumer groups can help you find makes and models that are rated well for reliability and low repair costs. If a car doesn’t have a good resale value, there may be a reason. Don’t forget to check gas mileage and maintenance costs as well.

Test Drive Used Cars

Never purchase any vehicles without taking them out for a test drive. Listen to the engine, pay attention to any knocking or pinging and get a feel for how smooth the ride is. When you test drive, make sure you take the vehicle on local roads as well as the highway. Trying a used vehicle under a variety of condition will help you narrow down your options to cars that you’re truly comfortable driving.

Get a Vehicle History Report

Request a vehicle history report from one of several online services. You’ll need the vehicle identification number (VIN number), which any auto dealership can provide you. You can also see it in the lower corner of the driver’s side window when you’re looking at it from outside. When you check the report, look for accidents, water damage and other issues that could affect the car’s performance.

Consider Other Costs

Insurance, monthly maintenance and fuel economy all figure into the actual cost of a car, not just the sticker price. Get insurance quotes, look into maintenance costs and check the mileage estimates. All of these will impact the car’s actual cost.

Proper research and working with a trusted automobile dealership will guarantee you the best price for your next used car.

Securing a Car Loan With Bad Credit: 4 Other Factors a Lender Might Consider

Bad credit happens, but it doesn’t have to stop you from getting financing for a vehicle. If you’re credit score is in a bit of a valley, it pays to remember that there are other factors lenders consider when deciding whether to approve your loan.

  1. Available Collateral

 

If you need an auto loan and you have a low credit score, then the value of the vehicle you’re purchasing becomes all the more important. This is because the market value of the car is what a lender would hold as collateral should you be unable to pay back your loan. The higher the value of the vehicle, the more attractive a risk you may look to a potential lender, even with poor credit ratings.

 

  1. A Cosigner

If you’re shopping for bad credit car loans, maybe finding a cosigner would be wise. This is somebody with good credit who will become responsible to pay off the loan should you find yourself unable to do so. This helps provide the lender with some security in their investment and reassurance that they will be paid back. A cosigner is usually a close friend or family member.

  1. Expenses Versus Income

 

If your expenses (other loan payments, mortgage payments) are moderate and your income is higher, than a lender is more apt to view you as a low-risk borrower. This could mean picking up that second job for evenings and weekends, or it could indicate that you should get whatever school loans and mortgages paid off that you can.

 

  1. Down Payment

If you can save up the cash, making a solid down payment may help demonstrate for a lender that you are serious about making good financial decisions. Another benefit to a down payment like this is that it reduces the principal loan amount, so there’s less money on the line and the lender has less cause for concern.

Despite your bad credit, these aspects of your finances are taken into consideration by lending institutions when you’re applying for a car loan. The above suggestions should be helpful in scoring the funds you need.

How to Secure the Best Car Loan

You may have spent countless hours looking for the perfect new car and are eager to move into the actual car buying process. However, if you plan on using a car loan to help pay for your new vehicle, then you should spend an equal amount of time looking for car loans. Here is how you can make sure that you secure the best car loan available to you.

 

Pay Attention to the Pricing

 

When you are looking for a car loan you should take into account how much you will have to pay per month as well as how much the loan costs overall. This can help you avoid falling for bad deals, which are more prevalent than many people realize.

 

It is important to have an idea of how much you are able to spend before you begin shopping around for a car loan. Having a budget in place can help you avoid getting locked into an adverse deal.

 

Loan Duration Matters

 

Another simple way to ensure that you are securing the best car loan is by paying attention to the overall length of the loan. Generally, the shorter the loan is the better. Some people hesitate about getting shorter loans because it tends to mean the payments are more expensive month to month. However, if you want to save more money in the end, then you may want to consider getting a short car loan.

 

Sometimes people choose longer loan terms since it allows them to space out their payments. The biggest downfall to longer loan terms is that the interest rates can add up over time.

 

In the end, the most important thing is to choose a car loan that you can afford to pay for each month. As you can see, purchasing a car loan takes just as much thought as buying a car. By studying the overall costs and the loan length, you will be able to find the best car loan.

Leasing a Car: When is it Better than Buying?

If you’re in the market for a vehicle, deciding between buying and the financial alternative of leasing is not always easy. There are some benefits to car leasing that merit looking into before making your decision.

Access to Higher Quality Vehicles for Less

Without going into serious debt, leasing should place within your grasp better, more expensive vehicles than your pocketbook could normally handle.

Minimal Repair Costs

In most cases, leasing puts you under the dealership’s warranty, which means that you’re not fully responsible for all repairs and maintenance, like you would be if you bought and owned the vehicle.

Smaller Down Payment

Your down payment on the vehicle is usually significantly lower when you’re leasing rather than buying, so in terms of fronting the cash, this is an appealing option. This should also keep you from being what’s called upside down in the loan, which means you owe more on the car than its worth.

Lower Monthly Payments

Generally, the monthly car payments will be more manageable when you’re leasing instead of attempting to buy, because you’re not paying as much principal. Maybe you have one of those minimum wage jobs that struggles to make ends meet the way you need it to; leasing a vehicle rather than buying might just help.

Frequent Vehicle Variation

If you’re someone who is normally interested in a new vehicle every couple of years or so, then you may find leasing is for you. Leasing is a great option if you want to switch out vehicles and have something different more often than if you were buying. It’s pretty easy: when you’re finished with the vehicle, it’s a simple drop-off at the dealership.

 

Owning a vehicle is appealing, but it’s true that car leasing holds some benefits of its own. With lower payments and less hassle at trade-in, it may be that leasing will be better for you and your circumstances, so don’t dismiss it.

Getting a Car Loan With Bad Credit

You know you probably need to replace your car, but your credit is not stellar. It is a mistake to assume that your low credit score is a deal breaker when it comes to financing your next vehicle, though. Dealerships handle bad credit car loans all the time, so don’t abandon all hope that you will be approved. All you need to do is prove that you are not as much of a credit risk as your score might indicate.

 

How Low is Your Credit?

 

Many people are unaware of their credit score. Maybe you assume that it is terrible because you had problems a few years ago. Before you come to the dealership, get a copy of your credit report. Not only may you be pleasantly surprised at your score, but you might also discover quick ways to raise your score. Be sure to correct any mistakes on your report that you find. If you catch them in time, you can get them corrected before you need the car loan.

 

How Much Do You Make?

 

If you have bad credit, you can often offset it with proof that you have a significant amount of disposable income. Credit only shows your payment history. It does not show your present or future. Your pay stubs, however, can give the dealership a fuller picture of your actual ability to honor the terms of the loan.

 

How Much Can You Put Down?

 

You can also increase your loan approval chances by making a large down payment. A large down payment can also help you get better terms on the car loan. This lowers the total amount you are asking to borrow, which makes you less of a credit risk to the dealership.

 

Your credit history does not have to end your chances of getting the car you want. If you can prove that you can afford the vehicle, your loan application is likely to be approved.