Compare loans to finance a used car

According to the Q3 2023 AutoTrader Price Index, the average cost of a used car in Canada is $39,155 – a 4.3% increase year over year. That’s a big chunk of money for most people, and if you don’t have a big enough bank balance to buy your next car outright, you’ll need to borrow some additional funds.

And that’s where used car financing comes in. A car loan allows you to borrow money to buy a used car, then pay back what you owe over a period that could range from 1 to 8 years, though lenders will require shorter loan terms for older models.

How do I finance a used car in Canada?

You can finance a used car from the following places:

• Used car dealer. Dealers are partnered with multiple lenders to help their customers get financing.
• Banks and credit unions. Some financial institutions provide used car financing for cars up to 10 years old.
• Online loan search platforms. These sites have a large network of dealers and lenders. They’ll match you with a used car loan based on your profile.

Learn more about each option below.

1. Dealership used car financing

You can get a used car loan directly through the dealership where you’re buying your car. Dealership financing is quick and convenient, allowing you to buy a used car on the spot, while online car dealers also offer financing.

Dealership car loan terms commonly range from three to seven years, and bad credit borrowers are often accepted. There may also be some wiggle room to negotiate a better rate.

But if you just accept a car loan offer from your dealer without comparing a range of other options, you won’t know if you’re getting a good deal. There may also be less flexibility when it comes to missed payments or early loan repayment, so check the fine print closely.

2. Used car financing from a bank or credit union

Some major banks offer used car financing, while you can also get used car financing through a credit union. Going through a bank can be straightforward if you already have an account, but you should still shop around for the best deal, as competing banks will offer different used car loan rates.

Terms of up to eight years are available, but be aware that you’ll need good to excellent credit to qualify for competitive used car financing.

3. Used car financing from an online loan search platform

There are many legit online car loan providers that finance used cars. It’s easy to compare loan rates and features online, and getting pre-approved for multiple offers makes it easy to shop around. Even if you decide to apply for dealership or bank financing, comparing online lenders first gives you leverage to negotiate and lock in the best rate.

You also get to choose from a range of competitive used car loan options, with loan terms ranging from one to eight years available in most cases. There are also many online lenders who offer bad credit car loans, but be prepared to accept higher rates.

Types of loans for used car financing

You have a few options when it comes to the types of loans available to pay for used cars. These include:

• • • Secured car loan. With a secured used car loan, your car is collateral. This option can help you qualify for a competitive rate, though you risk losing your car if you default on the loan. To qualify for this loan, the used car you’re eyeing must not be past a certain age, usually 10 years.
    • Home equity finance. Home equity financing is another option that allows a homeowner to borrow against the equity value of their home. This option can be risky because you’re putting your house up as collateral.
    • Line of credit. You can use a personal line of credit to pay for a used car. This option is flexible because you can borrow as much as you need to up to an approved limit, and you have the option to make minimum payments monthly.
    • Unsecured personal loan. Unsecured personal loans don’t require you to offer your car as collateral for the loan, but can result in higher interest rates.

Find out more about using a personal loan to finance a used car in our comprehensive guide.

What interest rate will I get with a loan for a used car?

The average car loan interest rate in Canada is 6.86%. However, the rate you get will vary depending on a range of factors:

• • • Buying used. Used car loan interest rates are usually higher than rates on new cars, so keep in mind that you may not be able to access a lender’s advertised low rate. The lender will take into account the make, model and age of the vehicle when setting your interest rate.
    • Certified pre-owned vehicles. Some car manufacturers offer discounted financing rates for certified pre-owned vehicles. You also get the peace of mind of buying a used car that has passed thorough inspections, has low mileage and is backed by a warranty.
    • Your credit score. Your credit score is a major factor in determining your interest rate. Borrowers with excellent credit can get the best rates, while borrowers with bad credit should expect steeper rates. Learn more about bad credit car loans in Canada.
    • Your income and employment information. A steady source of income is important to be able to repay a loan. So if you’ve been in the same job for an extended period of time and you exceed monthly income requirements, you’ll access a better rate.
    • Down payment. The bigger your deposit, the less money you need to borrow and the better the rate you will be able to get.
    • Fixed or variable rate. The interest rate on variable-rate loans fluctuates in line with changes to the central bank’s benchmark rate, while fixed-rate loans have the same rate for the term of the loan.

What credit score is needed for a used car loan?

The credit score you’ll need to qualify for used car financing will vary depending on the lender you choose.

If you’re applying with a bank or credit union, a score of 660 or more gives you a good chance of securing a used car loan. You can qualify for used car loan rates between 8% - 10%. If your credit score is lower, some banks, such as TD and Scotiabank, can offer car loans to borrowers with less-than-perfect credit scores.

Online lenders and dealerships are also willing to offer used car financing to borrowers with fair or bad credit. Rather than focusing on your credit score, these loan providers will assess your income, employment and debt-to-income ratio to determine whether you can afford to take out a used car loan. No matter where you apply, bad credit car loans often come with interest rates from 12.9% to 29.99%.

How to get approved for a used car loan with bad credit

If your credit history is less than perfect, there are several things you can do to improve your chances of car loan approval.

• • • Check your credit score. Check your credit score to find out exactly where you stand. This will give you an idea of which lenders may be willing to help you finance a used car.
    • If you can, improve your credit first. Before applying for a used car loan, pay down your credit card debt as much as you can and make sure you don’t have any late bill payments.
    • Set your budget. Before applying for a used car loan, find out exactly how much you can afford to borrow. Make sure you’ll be able to afford all of your regular expenses on top of your car loan payments.
    • Apply for pre-approval. Applying for car loan pre-approval with multiple lenders will help you compare rates and terms to decide which used car loan is best for you.
    • Apply with a cosigner. A cosigner is someone with good finances who agrees to sign the loan with you. By signing, they agree to cover loan payments on your behalf should you default on them.

How to compare used car financing options

Securing the right financing is as important as finding the right car. Here are the main components of a loan you should consider:

• • • Interest rate. The interest rate directly affects your monthly car loan payment. Most lenders will offer a range of used car loan rates, so be sure to understand your credit score and confirm that the rate you’re given is actually a good deal.
    • Fees. Lenders can charge a range of fees on used car loans — termination fees, origination fees, loan maintenance fees and more. Review all the extra costs that come with your used car loan since these will impact your APR and the amount you end up paying overall.
    • Repayment flexibility. Can you make additional and lump-sum payments during your loan term? Are you able to repay your loan early without penalty? Is there a grace period for late payments? Make sure your loan is flexible so it suits your needs.
    • Loan term. Opting for a longer loan term means your monthly payment will be smaller, but it also means it’ll cost you more overall to pay back what you borrow.
    • Eligibility requirements. Check what credit score, income and employment criteria you need to satisfy to qualify for a loan. Don’t forget to find out that the car you buy will need to satisfy lender requirements too, such as being under a certain age.
    • Pre-approval. Check whether the lender offers pre-approval. This makes it easy to compare loans and gives you more bargaining power when shopping around.

How depreciation impacts your used car loan

Car depreciation causes a new vehicle to lose up to 30% of its value in the first year. By purchasing a used car that is at least a year old, you’re basically letting the previous owner soak up that cost of depreciation. This strategy means you can get a smaller used car loan for a car that is nearly brand new.

In a recent Finder survey, where more than 1,011 Canadians were asked about their plans to buy a vehicle in 2023, 25% wanted to buy a used vehicle. While women were more likely to shop for a used vehicle (29%), compared to men (21%), virtually every demographic — from millennials to baby boomers — seriously considered a used car or truck purchase in 2023.

Turns out that where a person lives may influence the type of vehicle they want to buy in 2023. According to results from the Finder: Consumer Sentiment Survey Q2 2023, New Brunswick residents were the most committed to finding a used vehicle in 2023, while residents in Newfoundland and Labrador were not at all interested in a used vehicle purchase in 2023.

How much do used car loans cost?

To give you an idea of how much your car loan will cost, let’s look at the example of a $20,000 car loan. As you can see in the table below, the interest rate and loan term can have a big impact on your monthly payment amount and the total cost of your loan.

Find out how much you can expect to pay for your used car financing by entering your loan details in the calculator below.

• How to use this used car loan monthly payment calculator

  • • 1. Enter the amount you want to borrow to buy a used car under the Loan amount. Remember the loan amount may not be the same as the price of the car when you factor in car sales tax and your down payment.
      2. Write the amount of time you have to pay off your car loan under Loan terms (in years). If your loan term is in months, divide the amount by 12, first.
      3. Enter the interest rate you expect to pay on a car loan under Interest rate. If your car loan comes with fees, enter the annual percentage rate (APR) instead.
      4. Click Calculate.

  In addition to your monthly payment, this calculator shows how much you’d pay on your loan’s principal amount and how much you’d pay overall in interest. The principal amount is the amount that you borrowed and should be equal to your loan amount. Total interest is the amount you would pay on top of the principle — the cost of having your loan.

How much it really costs to own a car

What are the steps to getting a loan for a used car from an online lender?

When you’re ready to apply for a used car loan, here’s what you need to do:

• • 1. Work out your budget. Before you start shopping, calculate how much you can afford to pay each month. List out your monthly expenses and create a buffer for emergency expenses, too. And don’t forget to include upfront costs that come with purchasing a car, like a down payment, taxes and licensing fees, when setting your budget.
    2. Compare your options. Your next step will be to compare your used car loan options. While dealership used car financing can be useful, you should still know what kind of rate you can expect and have a few backups in case the dealership doesn’t come through. And if you’re buying through a private seller, finding financing beforehand is likely your only option to secure the sale.
    3. Get pre-approved. Apply for pre-approval to compare the cost of used car loans. When you’ve found the loan that’s right for you, it’s time to start shopping.
    4. Choose a car. You can visit dealers in person or even buy a vehicle online. When you find one you like, use resources like Canadian Black Book, Auto Trader Canada, and Kijiji Autos to determine its market value based on the year, make, model, mileage and condition. This can help when it comes to negotiating the price. Make sure to take the car for a test drive and get it inspected by a licensed mechanic before you buy.
    5. Buy your car. Now it’s time to sign the loan contract with your lender or car dealership. Review the loan offer carefully before signing, then set up your repayments and drive away in your new (to you) car.

What do I need to apply for a car loan?

To qualify for a car loan you will need to:

• • • Be 18 years old or the age of majority in your province.
    • Be a Canadian citizen or resident.
    • Have a valid Canadian driver’s licence.

You’ll also need to satisfy any other minimum requirements a lender has, such as:

• • • Minimum credit score requirements (you’ll often need to submit to a credit check).
    • Minimum income requirements (you’ll need to provide proof of income, such as pay stubs or bank account statements).
    • Minimum employment history (for example, you may need to have held your current job for at least six months).
    • Car insurance in order to secure an auto loan.

Should I put a deposit on a used car?

Some lenders might request a deposit. This usually happens in three situations:

• • • If you don’t have financing available after you negotiate the purchase price.
    • If the dealer needs to order your vehicle from a factory.
    • If the dealer you’re working with needs to exchange vehicles with another dealer before you get your car.

In any of these cases, it may be necessary to leave a deposit for your used car, but that doesn’t mean you have to settle for the dealer’s terms. Every step of a car purchase can be negotiated, and that includes your deposit.

Tips for making a deposit on a used car

• • • Make sure it’s refundable. Read the terms of your contract carefully and have a sales manager change it if you find that it’s nonrefundable. That way you can back out if you don’t have financing on hand right away or haven’t had the car inspected.
    • Make sure it’s not listed as a partial payment. Deposits should never be listed on your contract as partial payments — it’s not a down payment on your car. This makes it easier for you to walk away from the deal, should you change your mind.
    • Pay with a credit card. You can easily dispute the charge with your credit card company if you decide to not go through with the sale.

Bottom line

A used car can be a reliable option when you’re looking for your next set of wheels — as long as you make sure you get the right used car financing. Whenever you apply for a used car loan, take the time to read the terms and conditions. It’s important to be aware of all fees and charges, as well as any restrictions on the vehicle or loan.

Frequently asked questions about used car financing

• Can I finance a second-hand car?

  Yes. Banks, credit unions, online loan search platforms and car dealerships can all help you find used car financing in Canada. However, keep in mind that the lender may limit loans to vehicles of a specific age — for example, loans may only be available for vehicles less than 10 years old.

• Can I lease a used car instead of taking out used car financing?

  Yes, some dealerships allow you to lease used vehicles. The advantage of leasing is that it provides lower monthly payments, but it's worth remembering that your payments go towards using the car rather than owning it. Find out more in our leasing vs financing guide.

• Do used cars cost more to finance than used cars?

  While the sticker price on a used car might be cheaper, a used car loan tends to come with higher interest rates. That's because car loans are secured by the value of the vehicle. Since used cars have less value, your collateral isn't worth as much, which makes you a slightly riskier borrower. Higher collateral means lower interest rates because the lender stands to gain something more valuable if the borrower can't pay back their loan.

• What is the oldest used car you can finance?

  Typically, lenders won't finance a used car that's more than 10 years old, although some dealers won't finance a vehicle that is over seven years old. If you want to finance an older vehicle, look into lenders who specialize in financing classic cars or consider applying for a personal loan instead.

• Can I get a used car loan with bad credit?

  Yes, it's possible to get a used car loan with bad credit. Online lenders and dealership financing is available to people with low credit scores, no credit or bankruptcy as long as you have a steady source of employment income. Keep in mind, however, that bad credit car loans come with steeper interest rates — typically between 6.86%% and 29.99% — because of the borrower's higher risk of defaulting.

• Can I get used car financing in Ontario?

  Yes. Online lenders, banks, credit unions, and dealership financing are all available for used cars in Ontario. Check out our guide to buying a used car in Ontario to find out how to secure your next set of wheels.

Written by

Tim Falk

Writer

Tim Falk is a freelance writer for Finder. Over the course of his 15-year writing career, he has reported on a wide range of personal finance topics. Whether you're investing in stocks and ETFs, comparing savings accounts or choosing a credit card, Tim wants to make it easier for you to understand. When he’s not staring at his computer, you can usually find him exploring the great outdoors. See full bio

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