Compare car loans

With so many car loans in the marketplace and different types of lenders, which one should you choose? Read this guide so you can confidently decide which auto loan is right for you.

How does auto financing work?

A car loan is a type of financing used specifically to purchase a new or used car. After buying the car, you’ll make regular payments of both principal and interest until the loan is fully paid off. Auto loans are usually secured loans — the car itself is used as collateral and can be repossessed if you don’t make payments.

How much you can borrow and what interest rate you get depends on the lender and your personal financial situation. To make sure you get a competitive deal, compare offers from multiple lenders before signing on to any car loan.

Three main components make up your car loan:

• The principal

  This is the total cost of the auto loan, including any fees that the lender or dealership add on for the car loan. In short, this is how much you’re borrowing and need to pay back.

• The term

  This is how long you have to pay off your loan. As a rule of thumb, car loan repayment terms are typically between two and ten years, depending on how much you’re borrowing and how much time it’ll take for you to pay it back. Longer car loans come with lower monthly payments, but you end up paying more in interest over time. Your best option is to choose a repayment plan that you can stick to with the goal of getting out of debt as quickly as possible.

• The interest rate

  This is the percentage that your lender will charge you to borrow the money for your auto loan. Your car loan interest rate will depend on a series of factors, including your lender’s prime rate, your down payment, your credit score, your income, the terms of your loan and the type of vehicle you want to purchase. If you have a strong credit history and a stable salary, you’re more likely to qualify for a lower interest rate.

How much do car loans cost?

When it comes to how much you’ll pay for auto financing, you need to factor in both ongoing costs built into the loan and upfront costs. These are going to include the interest rate, fees, down payment and sales tax.

Upfront costs

• Down payment. How much you’re expected to put down affects the immediate cost of your car loan. Expect to pay 10% to 20% of the cost of your vehicle upfront. Some lenders offer you the option to apply for a loan without a down payment at all.
• 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 tax when estimating the cost of your car, as this can add a hefty amount onto the cost, usually between 13-15%.
• Fees. Some lenders charge an origination fee of 1% to 5% of the loan amount. An origination fee is a fee to process your loan and is deducted from the loan amount.

Ongoing costs

• Interest rate. The average car loan rate is 4.44%, according to Statistics Canada. The lowest rates hover around 3%, though these are reserved for individuals with excellent credit and a low debt-to-income ratio. Borrowers with poor credit usually see rates in the double digits as high as 19.99% or more.

What is APR?

Your APR, or annual percentage rate, is a combination of your interest rate and financing fees, providing you with the total sum you’re borrowing. It shows you the true cost of your car loan.

In addition to APR, the length of your loan term also affects the overall cost. Your loan term is the amount of time you have to pay off your loan. A short loan term generally results in higher monthly payments, but a lower total loan cost. A longer loan term gives you lower monthly payments, though you’ll ultimately pay more in interest.

How is APR calculated?

Typically, your APR is determined by a number of factors, including the following:

• The amount you need to borrow
• Your down payment
• The length of your term
• Your credit score
• Your income
• The type of car you’re financing

Keep in mind, there are two types of interest calculations on a car loan:

• Simple interest, which is only charged on the original amount you’re borrowing to finance your car purchase.
• Compound interest, which is calculated with both your principal and the interest that’s adding up since the start of your loan.

Where to get car loans

• Banks. Your bank most likely offers auto financing or a personal loan you can use to buy a car. Banks offer competitive interest rates, but you will need a good to excellent credit score to qualify.
• Credit unions. Credit unions car loans also offer some of the most competitive interest rates, but you also need good to excellent credit and may need a membership to access their products.
• Online lenders. Online car loan providers have more lenient requirements and can offer loans to borrowers with any credit situation, good or bad. They are faster to fund loans than banks and credit unions since their application process is less strict. However, online lenders tend to offer higher interest rates.
• Online brokers. Online brokers like CarsFast or Loans Canada could be an ideal option if you have bad credit. By filling out one simple application, you can get car loan offers from multiple lenders who want to finance you.
• Dealerships. You can always try to get financing directly from the dealership, though you might need to become a master negotiator to dodge typical dealership tactics. Dealerships may come with their share of hidden fees you need to pay attention to, but they’re pretty convenient. You can shop for your dream car and secure financing in the same spot.

Types of auto loans

There are many types of auto loans, which include the following:

• New car loans

  You’ll use a new car loan to purchase a vehicle directly from a dealership or manufacturer. Interest rates tend to be relatively low, and you could find loan terms up to 6 or 7 years. But despite the lower rates, new car loans cost more. Between the larger loan amount and depreciation, you may end up owing more on your car than it’s worth.

• Used car loans

  If you’re looking for a more economical way to buy a car, a used car loan is your best bet. You’ll easily save more by purchasing a used car compared to a brand new one.

• Fixed-rate auto loans

  Banks, credit union and online lenders offer fixed-rate car loans. With a fixed interest rate, your payments will stay predictable throughout your loan term.

• Variable-rate auto loans

  Banks and credit unions offer variable-rate car loans. With a variable interest rate, your interest will fluctuate with the market, which can change your payments. A variable rate generally has a lower starting rate than a fixed rate. It is advantageous when rates are stable or falling.

• No money down car loans

  No money down car loans don’t come with the traditional requirement of coming up with a down payment. Ideally, your credit is in great shape because no money down car loans are more difficult to qualify for. Your lender is allowing you to borrow money without you throwing any skin in the game after all.

• Car loan refinancing

  If you’re struggling to keep up with your monthly repayments, refinancing your car loan can provide you with some relief. It basically helps you extend your loan terms so your monthly payments become more affordable.

• Bad credit car loans

  If you’re having trouble financing a car through conventional loans with your less-than-perfect credit, bad credit car loans may be your best option. These loan options often come with higher interest rates and fees though so do your homework to secure the best terms.

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How to find the best car loans

Before you compare lenders for car loans, 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.

To get the best car loan, ask yourself these 10 questions:

Click on each question to expand more information about what to look for.

• 1. Am I eligible for an auto loan?

  There’s no point in applying for a loan if you don’t meet the lender’s minimum eligibility requirements. You can find these requirements on the lender’s website or in online reviews. The basic eligibility requirements include being a Canadian resident with a valid address, government-issued ID and bank account. After that, lenders focus on your credit score, your job title, your income and how long you’ve been receiving this cash flow into your account.

• 2. What is a good credit score for buying a car?

  Your credit score will range from as low as 300 up to 900. Anyone with a credit score of 650 and higher falls into the category of having very good to excellent credit. Lenders will see that you pay your bills on time and you manage your debts responsibly. People in this category are often eligible for a loan from traditional lenders, such as a bank or standalone lender, at a much more competitive interest rate.

  People with a credit score of 649 to 600 fall into the “fair” category, where your credit is seen as good. Finally, anyone with a credit score of 599 and below may end up having to pay more in interest, use an asset for collateral to secure a loan, or ask a friend or family member to co-sign on their loan. Don’t fret though – there are plenty of online lenders that specialize in working with people with less-than-perfect credit.

• 3. How much can I borrow?

  Does the lender offer loans that cover the total cost of a car you’re interested in, and that you can afford? Don’t be convinced by a dealer that you can upgrade models if you know it’s out of your budget. You need to come into negotiations with a clear idea of how much you can afford and stick within those financial parameters. You don’t want to overcommit to a loan you’ll have trouble paying back. Doing this could hurt your credit in the long run if you are late or miss payments altogether.

• 4. Are the interest rates competitive?

  A high minimum advertised interest rate isn’t the best sign and a refusal to disclose interest rates can be even worse. It could mean that the rates are so high, the lenders would rather not advertise them. Your job is to do your homework and shop around for interest rates, so you have a rough estimate of the rates you can receive based on your financial circumstances.

• 5. What are the fees?

  On top of dealership fees and taxes associated with buying a car, some lenders charge origination fees for taking out a loan. If you’re working with an online broker that connects you with local lenders who have pre-qualified you, using the brokerage may not come with any fees but your lender may have its fair share of charges. Before you agree to work with any lender, double-check on its list of fees and charges. You could be agreeing to hefty charges for making changes to your loan terms or making a late payment.

• 6. How long are the loan terms?

  Does your lender offer terms you can afford after you factor in APR and other costs involved in getting a new car? Your goal here is to agree to loan terms that you can stick to so you aren’t struggling to fit your monthly repayment into your budget. Some loan terms can extend to as long as eight years up to a decade. You also need to ensure you’re agreeing to terms that help you get out of debt as fast as you reasonably can so you aren’t staying in the red longer than you need to.

• 7. What's the down payment?

  A 10% down payment is standard, but some lenders charge more. Go for a lender that offers a down payment that fits your budget. In some cases, lenders don’t require a down payment at all.

• 8. Is it cheaper to lease or buy a car?

  For those leaning toward leasing a car, remember that the value of your car decreases over time. There’s a chance that leasing that car will cost more than just buying it if you’re in it for the long term. It’s usually cheaper to buy a car. However, one of the differences between buying and leasing a car is that, as a lessee, you don’t have to worry as much about maintenance and vehicle upkeep. You may have to use the car more carefully though – you’re on the hook for any damages made to the car when you return it.

• 9. How is the lender's online reputation?

  Quickly scan online forums and review sites and talk to family and friends to see what people say about each lender. Are interest rates high? Do people have trouble making repayments? Is there poor customer service? Common issues with a certain model? If anything sounds sneaky, run.

• 10. What services does it offer?

  Some lenders hold your hand throughout the process of getting financing, and others don’t. Consider the help if you don’t know what you’re doing – but also ask: Is the lender genuinely helpful or just pushing you into spending lots of money?

What else do I need to know before I apply for car loans?

Here’s the information you should have about your finances, the lender and the car loans you’re considering before you apply.

• Your budget

  Before you compare lenders, calculate now how much you can afford for a down payment and monthly repayments, factoring in all of the fees and your loan’s overall cost. Make sure you look into the required taxes and fees in your province or territory too.

• Rates and fees

  Ideally, you’ll have done your research and compared rates and fees with multiple lenders. Make sure you understand how each lender breaks down your APR because some will charge an origination fee while others will have a separate slate of charges.

• Your terms

  In addition to APR, the length of your loan term also affects the overall cost. Your loan term is the amount of time you have to pay off your loan. A short loan term results in higher monthly payments, but a lower total loan cost. A longer loan term gives you lower monthly payments, though you’ll ultimately pay more in interest. Based on your budget, you’ll have a rough idea of how much you can afford to pay each month and how long it’ll take you to realistically pay off your loan.

• What kind of car you'd like to buy

  Lenders will ask you outright how much you’d like to borrow, and some may even ask you to zero in on precisely the car you want to ensure their partner dealerships have it on hand. It’s also important to know what you want so that you aren’t persuaded to take out a higher loan to buy something more expensive.

• Eligibility requirements

  Before proceeding, get your ducks in a row by making sure you meet your shortlist of lenders’ eligibility requirements. Know your credit score. Make sure you have documentation on hand to prove your income, via bank statements, for example.

• Available rebates

  If you’re financing with a dealer, ask about any cashback 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 some provinces.

• Lender repayment policies

  Find out if you’ll be able to repay your car loan early without penalty or if you can make additional payments without being charged a fee. These features can save you money if you plan on paying the loan off ahead of time.

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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.

• Step 1. Get pre-approved.

  What does a pre-approved car loan mean? When your lender pre-approves you, it means they’ve qualified you in advance for an auto loan, but the loan is not guaranteed. The lender has simply done a light review of your finances, likes what it sees so far and wants to proceed with your application towards approval.

  Depending on what type of lender you’re borrowing from, you might need to have a specific car in mind to qualify. Others will just want to know how much you’re willing to spend, including taxes and fees. Regardless of which choice you choose, go in with a specific number in mind.

• Step 2. Choose your loan.

  Your lender will tell you the type of loan you stand to get once you’re preapproved. Some lenders also guide you toward vehicles you can qualify for at this point. Carefully consider your finances to make sure you can afford your loan before taking the next step.

• Step 3. Submit your documents.

  At this point, your lender might ask to see documents to verify your income, insurance and more. Online lenders typically allow you to upload forms and documents as PDFs.

• Step 4. Read your loan agreement before signing.

  You typically need to sign off on your loan before going to the dealership, but that’s not always the case. Regardless, read the terms and conditions with extra care, and look up anything you don’t understand. Never skim a loan contract – always read it thoroughly. Zero in on charges you may incur for late or missed payments, for any refinancing changes you decide to make to your loan, and if there is an option to make lump sum payments ahead of schedule.

• Step 5. Compare insurance policies if you don’t have one already.

  You must find insurance before purchasing a car. While your dealership (and some lenders) can offer insurance, you won’t necessarily get the best deal through them. This is another instance where it pays off to comparison shop, receive quotes online or make a few phone calls. If you already have home insurance or your partner has auto insurance on their car, it may be worthwhile to contact your broker to see if you can bundle up on services.

• Step 6. Go to the dealership.

  See if your lender can set up an appointment for you. Otherwise, go to the dealership and tell the salesperson who you’re financing with. Then, pick out a car you can afford.

• Step 7. Negotiate your final price.

  This step can be the most uncomfortable, but also the most crucial. Negotiation is generally expected at car dealerships – and reflected in prices.

• Step 8. Read the papers carefully.

  Look out for extra unnecessary fees and confusing language. Ask lots of questions, especially if something seems fishy. You want to feel comfortable and secure in understanding the loan you’re committing to.

• Step 9. Sign the paperwork.

  After paying the dealership, your lender will take care of setting up your loan’s repayment schedule. Now that you have your repayment schedule in hand, fit your auto loan payments into your budget and automate your payments if you can so you don’t miss any.

• Step 10. Register and get ownership for your vehicle.

  You can register, get ownership and get registration plates for your car at Service Canada, for a fee. You may also be able to do some of these steps at the dealership.

What documents do I need?

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, bank statements 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 pre-approval 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 car 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.

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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. With many lenders, you can set up automatic payments so you don’t forget to pay. Some even offer a discount on your interest rate for signing up for automatic repayments.

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 off.

Before signing your loan contract, find out if you can make early repayments without incurring additional fees by contacting your lender directly.

Frequently asked questions

• How easy is it to get a car loan?

  How easy it is to get approved for a car loan depends on several factors. These include your creditworthiness, your income and how much you can afford to pay for a down payment. If you have strong credit and enough disposable income to afford a down payment plus monthly repayments, getting approved isn’t difficult.

  The state of the economy can affect how easy it is to get a car loan. If the economy is doing poorly and you work in an industry that’s experiencing a lot of lay offs, lenders might be more cautious about giving you a car loan. On the flip side, if the economy is doing well, lenders are typically less concerned about you losing your job and could be more willing to approve you with favourable rates.

• What's a good APR for buying a used car?

  What makes a good APR depends on your personal credit score. If you have excellent credit, a good APR could be 0.99% to 4% on a used car loan. If you have poor credit, the lowest APR you may be eligible for could be around 12%, or much higher. It all depends on your creditworthiness and your options.

• Are auto loans secured loans?

  Generally, yes. Most car loans are secured with the value of your car, which can be repossessed if you stop making repayments. In fact, you typically don’t own your car’s title until you’ve paid off your loan entirely.

• Do I have to be a Canadian citizen to apply for a loan?

  Usually, you will need to be a Canadian citizen or a permanent resident. However landed immigrants can sometimes be approved for car loans. Having a valid Canadian address will likely be the most important factor.

• Can I refinance my auto loan?

  Yes. Refinancing can offer you a better rate and lower repayments and is an option available from many lenders.

• Do I need a down payment for auto loans?

  This depends on the lender you are applying with. Check the requirements of the loan before you apply.

• Should I lease my car instead of buying it?

  Leasing a car can be an option to consider if you’re looking for a newer model car every two or so years – just remember you will never have ownership of this vehicle. Repayments will generally be lower on lease agreements but they are harder to get out of than just selling a car under finance, so you need to be sure you’ll want the car for the next two years. Learn more with our buying vs leasing a car guide here.

• What credit score do I need to get 0% financing?

  Typically, 0% financing is only available to borrowers with excellent credit scores – between 800 and 900. Dealers typically also consider aspects of your personal finances like your income and debt-to-income ratio when deciding your interest rate.

• Will shopping for a car loan affect my credit score?

  Credit scoring systems usually count multiple auto loan inquiries within a certain time frame – typically two weeks – as one. One inquiry may cause a small, temporary drop in your credit score. But it’s better than multiple inquiries.

• I have bad credit. Do I need a cosigner to take out an auto loan?

  Not necessarily. Some providers specialize in bad credit car loans, though these typically come with rates in the double digits. You may also qualify for a car loan without a cosigner if other aspects of your application are strong, such as having a consistent income or large down payment saved up.