New car loans are typically secured term loans backed by your new vehicle. Generally you can borrow between 80% and 100% of your vehicle’s value and cover the rest of the cost upfront.
Once you get your funds either through a dealer or a third-party lender, you pay it back plus interest and fees in monthly installments. Usually, it takes between two and seven years to pay off a car loan. If you fall behind on your payments, your lender can repossess your vehicle.
Secured car loan. Most car loans uses the new car as collateral if you default on payments. The interest rate is typically less than what comes with an unsecured loan because there’s less risk for the lender.
Unsecured car loan. An unsecured loan doesn’t hold the car as security. You typically need good or excellent credit to qualify for favorable unsecured rates.
Variable rate car loan. Variable rate means that interest rates can increase or decrease according to the lending market. The variable rates can potentially be cheaper or more expensive than fixed rates.
Fixed rate car loan. A fixed rate loan locks in an interest rate throughout the term of the loan giving you certainty that payments won’t change.
Bad credit car loan. If your credit history has suffered a few black marks and you need a new car, you can consider a bad credit car loan. These loans often come with higher interest rates due to higher risk.
New car loans don’t have to be for brand new cars — the majority of lenders accept a vehicle up to two years old from a dealer or private sale as well.
What’s a good interest rate on a new car loan?
Anything below 5% is considered a good interest rate on a new car loan. However, you won’t be able to qualify for a good rate on a car loan unless you have good or excellent credit. In Canada, credit scores usually range from 300-900, and if your score is 650 or higher, you have a good chance of being approved for a loan. If your score is below 650, you may have trouble getting approved for a loan, and if you are approved, you will probably be charged a higher interest rate.
How to find a competitive rate on a new car loan
Here are some factors to consider when comparing loans for a new car:
Interest rate and APR. These two rates pinpoint how competitive a loan is. The interest rate is the monthly interest you’re charged on the loan, while the APR (annual percentage rate) reflects the amount of interest you’re charged yearly on the loan, including any fees or costs associated with getting the loan. The APR shows how much interest you will have paid by the end of the loan term.
Other fees and charges. These extra costs can include the costs of obtaining the loan as well as fees for terminating the loan early (if, say, you want to change lenders). The lender should be transparent about any fees before the agreement is finalized — always read the terms and conditions.
Extra payments. Lenders may vary in their terms, however you may be able to repay your loan earlier without paying any fees. Be sure your loan doesn’t come with any fees for early repayment that could increase your costs overall.
Eligibility. Before applying for a new car loan, make sure that you meet the lender’s minimum eligibility requirements. The most important requirement is usually a good credit score or at least an adequate income paired with a history of making loan payments on time and in full.
Loan amount. You should also check the lender’s minimum and maximum loan amounts to ensure that you can get the funding you need.
Other factors to consider
Down payment. Typically you’ll have to make a down payment of 10% or 20% of the new car’s value. Doing so can help you save in interest.
Loan term. While it might be tempting to get a 72-month car loan, the longer your loan term, the more you’ll end up paying in interest.
Sales tax. Make sure your lender is including the sales tax when estimating the value of your car.
Emily buys a new car
Emily lives in Ontario and recently got a new job in another city, so she decides to buy a car to drive to work. She visits a dealership and picks out a 2020 Toyota Yaris priced at $19,800.00. Emily makes a 20% down payment of $3,960.00 and heads to her local bank to get an auto loan to cover the remaining $15,840.00 + $2,574.00 HST on the purchase price.
Because she has a solid credit history, Emily is approved for a $18,414.00 auto loan with competitive terms. Along with the cost of her loan, she also pays approximately $180.00 to register her vehicle with the province of Ontario – this includes the cost of license plates, a sticker and a vehicle permit.
Cost of new car
Auto loan (term loan)
Interest rate (APR)
4.00% origination fee ($736.56)
$295.70 monthly or $136.35 biweekly
Total loan cost
$21,290.40 with monthly payments or $21,270.60 with biweekly payments
*The rates, fees and terms listed in this case study are used as examples only. This information is for a representative transaction. The actual cost of the product may vary depending on the retailer and the specs of the product, among other factors.
Pros and cons of a new car loan
Lets you purchase a new car without paying for it all at once
New cars are generally easier to finance with a loan
Can help build credit if the loan is maintained properly
Interest rates are generally lower on new car loans
Promotional 0% rates may apply if your credit score is high
New cars can depreciate in value quickly
It’s another payment to manage in your monthly budget
If your loan isn’t large enough, you’ll need to front the rest of the cost
3 questions to ask before you get a new car loan
What’s the final cost? It’s essential that all the costs associated with the car loan are established with the loan provider. The obvious costs are the interest rates, but there are other costs too — these may vary depending on the lender.
What type of loan makes sense? Fixed interest rates are common with car loan companies and won’t change throughout the loan period. Variable interest rates are more uncertain, as the loan provider could adjust the interest rate at any time depending on the market.
Can I pay the loan in full early? Early payment fees should be negotiated with the loan provider just in case the borrower’s situation changes throughout the loan period.
Frequently asked questions
If you can show a source of income and have a healthy credit score, you can still be eligible for a loan even if you’re retired.
It’s possible to get a new car loan with bad credit. But you’ll likely end up with higher rates and stricter terms than your good-credit counterparts. Instead, consider getting a new car loan with a cosigner to strengthen your application and possibly decrease your interest rate.
New car loan terms can vary from 2-7 years. The most common terms are for either 72 or 84 months (6 or 7 years).
Matt Corke is the head of publishing in Australia for Finder. He previously worked as the publisher for credit cards, home loans, personal loans and credit scores. Matt built his first website in 1999 and has been building computers since he was in his early teens. In that time he has survived the dot-com crash and countless Google algorithm updates.
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