Looking to buy your dream car but need some financial help? Find out more about loans for cars in our guide.
Sometimes the only thing between you and the open road is a new car loan. When you have your eye on a car, it’s easy to consider everything but the financing. However, knowing your options for buying, leasing or even refinancing your dream car can get you out on the road more quickly – and leave you with more money in your pocket to fund your open road adventures.
Read our guide below to find out how to get the best deal to finance your new car. We cover the different types of car loans available, the costs and some of the most frequently asked questions.
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Six common types of car loans
What kind of car do you want? Can you afford to buy a new or used car? Do you even want to buy a car – or do you just want to lease one for a few years?
There isn’t just one type of car loan out there for one kind of driver. The financing you need depends on your personal finances as well as what you’re hoping to get out of your loan. Although you’ll find unsecured car loans, most auto financing relies on securing your loan with the vehicle you intend to buy or refinance.
Most lenders offer a combination of the following types of lending:
- New car loans. These fixed-term loans from a lender or dealership are used to cover the cost of your new car.
- Used car loans. Similar to new car loans, these loans factor in the mileage and age on your previously-owned car when determining your interest rate and loan term.
- Private-party car loans. Term loans from lenders that allow you to buy a car from a private seller, rather than a dealership.
- Lease buyouts. This financing allows you to pay for the fee at the end of your already leased car, so that you can purchase it outright.
- Auto refinancing. Trade in your existing car loan to reduce your monthly payments or pay it off more quickly.
- Buy-here-pay-here loans. This last-ditch option helps people with poor credit avoid a hard pull on their credit report by financing their car directly through a dealership – but often with high interest rates and hidden add-ons.
How much do car loans cost?
When it comes to how much you’ll pay for your car loan, it ultimately comes down to three main factors:
- Interest rate. A percentage of your loan balance charged by your bank or lender and added to the principal amount you owe. Interest rates for car loans vary greatly, with rates as low as 0.99% to 12% or higher.
- Fees. Fixed charges added on to the cost of your car loan that you pay back along with the rest of your loan. Your loan’s APR is its annual fees and interest rate expressed as a percentage.
- Loan term. The amount of time your loan contract gives you to pay off your loan. A short loan term generally results in higher monthly payments but a lower total loan cost, since you will pay less in interest. If you can afford to make higher repayments each month you should, in order to save money.
APR is critical in calculating how much you’ll pay for your car loan, true. But finding a loan term that isn’t too long or too short also affects your overall costs.
Here’s how your monthly repayments and total loan cost would look for a $35,000 car loan at 12% APR based on four different repayment lengths:
| 24-month term | 48-month term | 72-month term | 84-month term | |
|---|---|---|---|---|
| Monthly payment | $1,684 | $922 | $684 | $618 |
| Total cost | $39,542 | $44,241 | $49,266 | $51,899 |
Bottom line: The longer your loan term, the more you’ll pay in interest, which ultimately means your car just got a lot more expensive.
Don’t forget the down payment, taxes and rebates
After your APR and loan term, you’ll want to pay attention to how much you’ll have to pay up front and in taxes – and ask about any rebates you might be eligible for. Remember to factor in:
Down payment. How much you’re expected to put down initially will affect the immediate cost of your car loan. Expect to pay about 10-20% of the cost of your vehicle up front. Some dealerships have $0 down, however you can usually expect to pay large monthly payments with this type of deal.
Sales tax. Sales tax differs between different provinces and territories, so contact Service Canada to find out more about the tax you should expect to pay. Make sure to factor in sales taxes when estimating the cost of your car, as this can add a hefty amount onto the cost, usually between 13-15%.
Rebates. If you’re financing with a dealer, ask about any cash back discounts to avoid leaving money on the table. Three main types include cash rebates, low-interest dealership financing and special leases. Government rebates for low-emission or hybrid vehicles are also available in most provinces and territories.
The truth about 0% financing
Some dealerships offer interest-free financing, but they’re not always easy to get and not necessarily the best deals out there. Generally 0% financing is a marketing tool that manufacturers use to bring in customers.
You’ll need to meet tough credit and income standards to qualify – only around 10% of applicants actually qualify for the 0% rate. But it might not be worth it even if you do make it past the credit check. These loans tend to be shorter, often no more than 36 months, translating into high monthly repayments.
You also won’t have as much room to negotiate the price and won’t qualify for a cash-back rebate. On top of this, your deal might be cancelled if you miss just one payment. In the end, you could wind up paying just as much, if not more, if you went for a car loan with interest plus higher monthly repayments.
The hidden cost of buying a used car
It sounds like a no-brainer: Used cars are cheaper than a vehicle hot off the assembly line. But while they tend to be cheaper up front, you could end up paying more over the life of a used car.
This is because manufacturers often subsidize new car loans to move less popular models out of dealership lots. Newer cars also tend to last longer than older models and need fewer repairs.
Unless you invest in a brand that’s known for its integrity and longevity, what you save on the sticker price might be guzzled away on routine maintenance and weak gas mileage. Carefully narrow down your used car options using online reviews, and consider one that’s certified pre-owned for additional protection against potential problems.
Higher interest rates on used car loans
On top of this, used car loans tend to have higher interest rates. That’s because car loans are secured by the value of the vehicle you’re buying. Since used cars are worth less, your collateral isn’t as valuable. This makes lenders see you as more of a risk than a new car buyer, whose collateral is simply worth more.
Lenders tend to give borrowers with more valuable collateral lower interest rates because they stand to gain something more valuable if the borrower can’t pay back their loan and their vehicle is repossessed.
Where can I get a car loan?
Back in the day, your financing options were limited to dealerships and affiliated lenders.
Today, however, you have more options beyond traditional financial institutions, including online upstarts competing for your business.
- Banks
Chances are that your bank offers auto financing or a personal loan you can use to purchase a new car. It’s a relatively hands-off experience and banks typically offer relatively decent interest rates, but only applicants with good to excellent credit typically qualify. However, it’s often a more familiar option since you already deal with your bank. - Credit unions
These nonprofit financial institutions offer financing that’s similar to a bank’s, but often with lower interest rates and more lenient credit requirements. You’ll need to be a member of the credit union to qualify for a car loan, which can add time to the process. If you’re already a member, then it might be a great option for you to consider. - Online lenders
Online loan companies can offer faster funding for people with damaged credit or those who are new to auto financing. Some specialize in helping you navigate the complicated process of buying a car at a dealership which can be helpful, especially if you are new to the process. - Online matching services
Get connected with lenders or dealerships that directly provide financing. Matching services could be an ideal option if you have a poor credit score, because many offer loans with low or no credit requirements – but your loan won’t be cheap. However, sometimes brokers can sometimes help you negotiate a better deal than you’d get on your own. - Dealerships
You can always try to get financing directly from your dealership, although you might need to become a master negotiator to dodge typical dealership tactics. This could be one of the more expensive options in the long run.
How can I find the best car loan for me?
Before you compare lenders, calculate how much you can afford to pay for a down payment, monthly repayments, any fees and your loan’s overall cost. Look up the taxes and fees associated with purchasing a car in your province or territory, and add them to the cost of each car you consider.
Banks, credit unions and online lenders often ask borrowers to choose a car before applying. Matching services and dealerships, on the other hand, usually ask you to come with an open mind.
Regardless of where you apply, narrow down the makes and models of different cars in order to get an idea of the type of car you can afford.
With those two tasks behind you, you’re ready to scrutinize offers to pick the best one for your personal and financial needs.
To get the best car loan, ask yourself these 9 questions:
Click on each question to expand more information about what to look for.
You’ll find that some of this information isn’t readily available online for loan-matching services and dealerships. In those cases, it’s worth taking a look at reviews, forums or calling a customer service line to get a ballpark answer.
5 tips to get the best deal on your car loan
- Order your credit report.
Before applying, carefully review your credit report for any mistakes or errors that can hurt your score. Clear these up before you apply – a better score usually results in lower interest rates. - Compare lenders and dealerships.
The only way to find the best deal for someone in your specific situation is to shop around and compare what’s out there. - Negotiate your price.
You can almost always get a better deal on a car if you don’t accept the initial price a dealership offers. - Don’t fall for the long-term loan.
It’s common for people to finance their car over a long period of time, like 72 months — and it’s also one of the most expensive. Calculating how much you can realistically pay monthly and sticking to that payment can save you thousands of dollars in the long run. - Read everything you sign.
It’s especially important to carefully read your contract when buying (or leasing) a car. Dealerships sometimes sneak in unnecessary fees or even leave room for re-negotiating a higher interest rate. Never skim over a loan contract. Take the time to read it fully.
Buying a car at a dealership? Watch out for extra costs
- Vehicle preparation fee. Dealerships charge this fee to cover the cost of getting your car ready for delivery. You might not have to pay it, unless they’re going beyond a standard car wash.
- Documentation fee. Most dealers charge this fee to cover the cost of processing the paperwork that comes with your new car.
- Unnecessary accessories and extended warranties. Didn’t ask for that sound system or paint sealant? See an extra-long warranty in your contract? Unless you actually want it, tell your dealer that you won’t pay for it.
4 red flags when looking for financing
Lenders or dealerships advertising any of these three “perks” should ring the alarm bells – or at least prompt deeper research.- There’s no credit check. Dealerships often don’t run a credit check for buy-here-pay-here loans, but other types of loan usually require a credit check. Direct lenders advertising no credit check could be a scam.
- It lets you take your car home before approval. This could be the sign of a “spot delivery scam,” where a dealer calls a few days later to announce that financing fell through and you now need to renegotiate your loan at a much higher price.
- It lies about your credit score. Some dealerships con borrowers into paying higher interest by telling them their credit score is worse than it actually is. Yet another reason to check your credit report, and know what that number means, before comparing lenders.
- It offers 0% financing. You may not pay an APR on your car loan, but you typically aren’t able to negotiate your price or take advantage of rebates. Loan terms also tend to be shorter, sometimes unaffordably so. Be very careful with this option, as it’s usually offered quite frequently.
Applying for a car loan
How do I know if I’m ready to apply?
You’re ready to apply for a car loan if you:
- Know how much you can afford for a down payment and monthly repayments.
- Look into the required taxes and fees in your province or territory.
- Know your credit score.
- Have a few vehicles in mind.
- Have thoroughly compared lenders.
- Are sure you meet your lender’s eligibility requirements – including car insurance.
I’m ready to apply. What do I need to do?
The car loan application process can vary wildly depending on the type of financing you choose. Getting financing from a dealership doesn’t involve most of the steps outlined below, for example – instead, you start at the dealership.
What documents might I need in order to apply?
Most lenders ask to see at least three documents when you apply for a car loan:
- Your driver’s licence. Your lender might ask to see your licence or require your licence number. Either way, have it on hand.
- Your insurance card. Some lenders require you to have specific car insurance before applying for a loan.
- Employment verification. You might be asked to submit tax returns or recent pay stubs to prove you make enough to afford your car loan.
5 reasons your car loan application was rejected
- Bad credit. The preapproval process for many lenders is a soft credit check only.
How to avoid it: Know your credit score and your lender’s credit requirements before applying. - Paperwork mistakes. Missing or incorrect information on your application can land you in the rejection pile.
How to avoid it: Carefully review your application before submitting it. Bonus points if you get someone else to look it over too. - A recent financial catastrophe. Foreclosure, tax liens and bankruptcies make you look like a risk to lenders.
How to avoid it: Wait a year or so before all of that is behind you. Waiting not an option? Try a lender that doesn’t have such strict requirements, though it might cost you in higher repayments. - You asked for too much. You can be rejected if your lender doesn’t believe you’re able to repay a loan.
How to avoid it: Only apply for a loan you can prove you can afford – not one you think you can. - Inconsistent income. Unpredictable cash flow is not assuring to a lender that wants to be sure you can pay back a loan.
How to avoid it: Freelancers might try to get a steady part-time gig on the books to show you have at least a reliable base income.
I got my car loan. What happens next?
So, you’ve finalized the deal that got you behind the driver’s seat. Now it’s time to start paying off your car loan. If it’s an option with your lender, set up automatic payments so you don’t forget to pay. Keep track of your personal account and loan balance to make sure everything goes smoothly. Sometimes even automated systems make mistakes. Contact customer service if you notice anything is off.
Prepaying your car loan: What you need to know
With most loans you can save on interest by paying off your loan early. This isn’t always the case with car loans, however. Some lenders charge early repayment penalties.
Before signing your loan contract, find out if you can make early repayments without incurring additional fees by contacting your lender directly.
How does car loan refinancing work?
Sometimes you need a car loan even if your personal finances aren’t in the best shape. Once your credit score is improved or you’ve started a new, higher-paying job, you might want to consider refinancing. This works by taking out a new loan to pay off the balance on your current car loan.
Refinancing with a new lender allows you to rewrite the terms of your loan. You can qualify for a new interest rate. You can lower your monthly repayments by extending your loan term. Or, you can save on interest by shortening the amount of time you have to pay it off.
Should I refinance my car loan?
It depends. Car loan refinancing involves taking out a new loan to pay off your old one, usually with lower rates and more favourable terms. Done right, refinancing your car loan could save you thousands of dollars in your loan, give you lower monthly repayments or both. But not everyone will be able to get a good deal.
When refinancing is a good idea
- Your credit has improved. Better credit typically translate into better rates.
- You got a raw deal. Believe you could qualify for a better deal given your credit rating? Look into refinancing to see if you can get a better refinancing rate.
- Interest rates are down. If interest rates have taken a drop across the board, it might be a good time to refinance even if your credit hasn’t improved much.
When you should hold off
- Your car is worth less than your loan balance. Lenders are generally not willing to refinance a car loan if it’s upside down – that’s when you have more debt than your car is worth.
- You have prepayment penalties. Refinancing involves repaying your loan early. You might not be able to save much if you have to pay extra fees to get out of your original loan.
- Your loan comes with front-loaded interest. If you paid most of the interest on your car loan in the first few months or years of your loan term, you don’t stand to save much by refinancing.
