You need to make plenty of hard decisions when you’re buying a car, but one that requires your full attention is your auto loan. How do you find the best car loans for your financial situation? What loan features should you be on the lookout for? It’s not an easy process, but by comparing lenders and keeping an open mind, you can find the best auto loan for your next car.
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The truth? There is no single best car loan option out there. Not everyone looking for a car loan is buying the same car, earns the same income or is in the same financial situation. The best car loan really depends on what you need from your loan, what you’re eligible for and what work well with your budget and lifestyle.
7 questions to ask to find the best car loans available
In order to find a car loan you can qualify for, ask yourself the following question when comparing lenders:
Am I eligible? Many lenders have credit and income requirements, and some only lend within certain provinces. Make sure you meet lenders’ qualifications before you do anything else.
Is my car eligible? Can you actually finance the car you want with this loan? Some lenders have restrictions on the age or type of vehicle that can be financed. Confirm with you loan provider that you’ll be able to purchase the car you want before you apply.
How much does the loan cost? Consider both the interest rate and fees that come with the loan. Compare the interest rates of similar loans to find the one that’s most competitive.
Are the payments flexible? Find out if you’ll be able to repay your car loan early without being penalized 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.
What are the loan terms? Car loan terms are generally between two and seven years. The longer the loan term you choose, the less your monthly payments will be. However, the cost of interest is always substantially higher with longer loans.
How much can I borrow? The loan amount the lender offers you depends on a couple of factors. Your credit history and financial situation will be important, but for a secured car loan, the amount of the loan will ultimately depend on the car’s cost.
What is the type of loan? It can be a loan for a new or used car, a low-interest car loan or loans for those with poor credit. You can even finds loans that offer pre-approval before you decide whether to accept the loan. Since all situations are different, look into all your options to find out which type of loan will benefit you the most.
Should I avoid financing at the dealership?
You likely won’t find the best car loans at a dealership because dealers outsource their loans to direct lenders. The interest rate a dealership receives from one of its partner lenders may be marked up by a few points so that the dealer can make a profit.
Of course, this doesn’t mean you won’t be able to find a good loan at a dealership, but it’s best to look into other financing options as well. This is not only a solid backup plan in case the dealer can’t offer you the best loan, but it also gives you an edge when negotiating. You never know — even with dealer markup, a dealership may be able to offer you the best loan if they want to prevent you from going to another lender.
Consider a newer vehicle. New car loans come with lower interest rates than used car loans because the lender is taking on less of a risk. Most new car loans allow you to secure a vehicle that’s less than two years old, so you may be able to finance a slightly used vehicle with a lower rate.
Quotes without credit inquiries. Too many inquiries can have a negative impact on your credit score — don’t inquire with too many lenders. If you’re applying for a car loan rate estimate, make sure no hard credit checks are already listed on your file. (Hard credit checks appear on your record whenever a lender makes a full, detailed inquiry into your credit history.)
Detail all of your assets and finances when applying. Some lenders offer lower interest rates if you have a large sum of money to fall back on. Even if you are applying for a secured car loan, listing other assets on your application may give you access to a better rate.
Borrow less than you’re buying the car for. Having a down payment or trade-in vehicle can cover part of the cost of a new car. If a lender sees that you don’t need to borrow 100% of the purchase price of the vehicle because some of the cost is already covered, you may be eligible for a lower interest rate.
Compare your options before you apply. Making car loan comparisons will let you know which lender has the lowest rates available. If you don’t want to do this yourself, you can consider using the services of a car finance broker.
Will I get a better deal with a larger down payment?
In general, yes. Lenders may be more willing to offer favourable terms if you have some money saved to use as a down payment. A larger down payment means you borrow less, which then reduces your monthly payment as well as the money you’ll pay the lender back in interest.
For instance, you’re looking to borrow $15,000 for a new vehicle. The lender you’ve chosen to go with has offered you a 60-month term with a 7.45% APR. By calculating your monthly payments with different down payment amounts, you can see how much money you’ll save each month and overall.
Down payment
Monthly payment
Interest paid
0% ($0)
$300.21
$3,012.78
10% ($1,500)
$270.19
$2,711.50
20% ($3,000)
$240.17
$2,410.22
In this example, by having $3,000 saved up, you end up spending about $600 less on your loan and reduce your monthly payments by $60. A sizeable down payment can make the best car loans even better by potentially saving you hundreds of dollars in interest over the life of your loan.
What do I need to apply?
What you’ll need to provide depends on the lender and the type of loan you’ve chosen — here’s what you’ll need:
Proof of your identity — either a passport or driver’s license
Financial details including any available credit you have, your debt and your assets
Proof of your income
Some lenders may require a void cheque or pre-authorized payment form to make automatic withdrawals from your bank account whenever payments are due
For secured loans, you’ll need to provide vehicle information including the make, model, year, purchase price and VIN (vehicle identification number). If you’re getting dealership financing, the dealer can usually provide this information for you. If you’re getting non-dealership financing, you will need to provide the lender with details about your dealer.
A down payment (if you have one)
Check exactly what you need with your lender before you submit your application.
Bottom line
Once you’ve found a loan that meets your needs, you’re ready to apply. Though eligibility requirements differ between lenders, you must be at least 18 years of age and a Canadian citizen or a permanent resident to qualify for a loan in Canada.
Frequently asked questions
Some lenders loan to people with low income, however, the amount you’re approved for will vary depending on the lender’s confidence that you’ll be able to pay it back. Generally, the minimum income required to buy a car in Canada is around $1,800 per month before any taxes or deductions. If you work 40 hours per week at a minimum wage job, then your income exceeds this threshold. If your income is too low, you may be approved for a car loan if you have a cosigner.
It depends how damaged your score is. As your credit score gets lower, your chances of getting the best car loans goes down and the interest rate you’ll be charged if you do get a loan goes up. Lenders are typically willing to offer the best car loans to people with credit scores of 650 or higher. If your score is 600-650, you might still be able to get a loan, but you will likely pay a higher interest rate. If your score is below 500, it is unlikely that you will qualify for a car loan.
Unless you have an impeccable credit history, most lenders will want you to provide a down payment. If no down payment is required, expect the loan to come with a high interest rate.
You can get a loan to buy a used car, but lenders may have restrictions on the age of vehicles they will finance as well as the mileage that vehicles can have. Find out more about getting a used car loan here.
Kellye Guinan is a writer and editor with Finder and has years of experience in academic writing and research. Between her passion for books and her love of language, she works on creating stories and volunteering her time on worthy causes. She lives in the woods and likes to find new bug friends in between reading just a little too much nonfiction.
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