About Car Loans in Canada
A car is one of the largest purchases that anyone will ever make, and in order to do so, a majority of the population requires a car loan to make it possible.
A car loan gives you the opportunity to get the money now to purchase a vehicle and pay it off in the future with interest. The average Canadian spends 400 to 800 dollars a month on car loan payments, so it is important to be aware of your financing choices.
In Canada, the average car loan interest rate has increased from 4.25% as of January 2017 to 7.10% in January 2025, making it more important now than ever to shop around for the best rates.
If you are in the market to buy your first car or you are simply trading in your old one to get something a little newer, then it is very important that you fully understand the ins and outs of car loans because this knowledge can save you thousands of dollars throughout the life span of your car loan.
What is a car loan
A car loan is the amount of money you take out on loan from a bank, credit union or any other lending institution in order to purchase a car. You are then obligated to repay this money with interest within a fixed time.
The vehicle itself is used as security, so the lender has the right to repossess it in case you default on your payments. When you get a car loan, you will make a monthly payment that consists of the money you borrowed (referred to as the principal) plus the interest that the lender charges.
That interest rate will vary based on a few things, such as your credit score, income, and the type of car you are purchasing.
In Canada, the majority of car loans are installment loans. With this, you pay a constant amount every month until the loan is paid. After paying a final payment, the car becomes yours fully.
Other lenders have variable-rate loans as well, in which your payment may increase or decrease depending on whether car loan interest rates increase or decrease. How much you can borrow is dependent on your income, credit rating, and the worth of the car.
Most lenders will lend you up to 100 percent of the value of a new car and approximately 80 to 90 percent of the value of a used car. This implies that you may be required to have a down payment, particularly on used cars.
Smarter Loans
- Expansive lender network: 50-60+ lenders
- Personalized pre‑qualification
- Side‑by‑side comparison tools
- Fast approvals & funding
- Robust educational resources
- Fully online, transparent process
- Expansive lender network: 50-60+ lenders
- Personalized pre‑qualification
- Side‑by‑side comparison tools
- Fast approvals & funding
- Robust educational resources
- Fully online, transparent process
- Loans $5k - $50k
- Repayment options between 12 and 96 months
- Interest rates ranging from 6.99% to 29.99%
- Options for no downpayment
- Open to most credit scores
- Online applications
- Loans $5k - $50k
- Repayment options between 12 and 96 months
- Interest rates ranging from 6.99% to 29.99%
- Options for no downpayment
- Open to most credit scores
- Online applications
Loans Canada
- Borrow from $5,000 to $50,000
- Loan terms from 3 - 60 months
- Access competitive interest rates
- Low Minimum Credit Score
- No fees to use Loans Canada
- Access to over 60 lenders
- Borrow from $5,000 to $50,000
- Loan terms from 3 - 60 months
- Access competitive interest rates
- Low Minimum Credit Score
- No fees to use Loans Canada
- Access to over 60 lenders
CarLoans411
- Open to all credit scores (300+)
- Large dealership network
- Fast approvals
- Flexible loan amounts
- Terms up to 7 years
- No fees or down payment required
- Open to all credit scores (300+)
- Large dealership network
- Fast approvals
- Flexible loan amounts
- Terms up to 7 years
- No fees or down payment required
How to compare car loans
Shopping around for the best car loan can save you hundreds or thousands of dollars. Start by checking your credit score since this affects the car loan interest rates you’ll qualify for.
You can get a free credit report from both Equifax and TransUnion in Canada. Look at the Annual Percentage Rate (APR), not just the interest rate.
The APR includes all fees and gives you the true cost of borrowing. A good interest rate for a car loan is somewhere around 7% to 8%, but your actual rate will depend on your situation.
Compare loan terms carefully and cautiously. The longer the terms, the less you pay monthly, but the higher the interest you pay in the long run. The total interest you will pay on a 5-year loan at 7% will be less than what you would pay on a 7-year loan at the same rate.
Determine the total cost of the loans and not only the monthly payment. Look out for extra charges such as application fees, early payment penalties, or gap insurance requirements.
Certain lenders impose these additional fees that may increase the cost of your loan by hundreds of dollars. Check out the reputation of the lender and the customer service rating before you make your final decision.
What can you use a car loan for
Here are a few things you can use a car loan to acquire:
- New Cars: The interest rates on new car loans are normally the lowest, since the car is fully under warranty and its value is known. The car loan rates vary between 0 and up to 36 percent, although the 0 percent interest normally applies to new vehicles. You may finance 100 percent of the purchase price, and the loan term may be up to 8 years. Manufacturer incentives and promotional rates also apply to new cars.
- Used Cars: The interest rates on used car loans are a little more expensive than the rates on new car loans since older cars present greater risks to lenders. The used cars interest rates are between 4.5% and 10 % on average. The majority of the lenders will need the car to be no older than 10 years and with less than 200,000 kilometres. A bigger down payment may be required, and the loan terms are usually less than those of new car loans.
- Car Leasing: This is not a car loan technically, but you can finance a lease with many of the same lenders. Leasing implies that you pay the depreciation of the car over the time of your lease, which is typically 2-4 years. The monthly payments are less than purchasing, however, you do not own the car at the end. There are lease contracts that allow you to purchase the vehicle at a specified price at the expiry of the lease.
When to get a car loan
If you’re wondering when the right time to secure a car loan is, here are the best times to consider getting one:
- When You Have Stable Income and Good Credit: To get lower rates on your car loan, your credit score must be over 650. A permanent job of at least 6 months also shows lenders that you have the ability to make regular payments. You can also wait and increase your credit score in order to save thousands of dollars in interest if your credit score is less than 650.
- Before You Start Car Shopping: Apply for pre-approval to know your exact budget and strengthen your negotiating position at dealerships. Pre-approval typically lasts 30 to 90 days and doesn’t hurt your credit score if you shop around within a 14-day window.
- During Manufacturer Incentive Periods: Plan your buying to coincide with end-of-model-year clearance sales held at dealerships in the late fall and early winter; this is when the dealerships are likely to have special financing rates. Nevertheless, do not allow promotional rates to persuade you to purchase an extra car that you cannot afford.
- When You Have a Down Payment Saved: Having at least 10-20% down payment reduces your loan amount, monthly payments, and total interest paid. It also shows lenders you’re financially prepared and reduces their risk.
- Avoid Getting a Car Loan When: If you’re facing job uncertainty, have high debt levels, are planning major life changes like moving provinces or starting a family, or haven’t saved for emergency expenses beyond the car purchase, then don’t get a car loan.
Pros and cons of car loans
Pros of car loans
- Build credit history: Making regular car loan payments helps improve your credit score over time
- Immediate ownership: You own the car from day one, unlike leasing, where you’re essentially renting
- No mileage restrictions: You can drive as much as you want without penalty fees
- Modification freedom: You can modify or customize your vehicle however you like
- Equity building: Each payment builds equity that you can use for trade-in value
- Long-term savings: Financing to own is cheaper than constantly leasing new vehicles
Cons of car loans
- Interest costs: You pay more than the car’s purchase price due to interest charges
- Depreciation risk: Cars lose value quickly, and you might owe more than the car is worth
- Monthly payment obligation: You must make payments regardless of your financial situation
- Insurance requirements: Lenders require comprehensive coverage, which costs more
- Repossession risk: The lender can take your car if you miss payments
- Maintenance responsibility: You’re responsible for all repairs and maintenance after the warranty expires
2 types of car loans
There are secured car loans and there are unsecured car loans. Here is how they compare:
| Features | Secured car loans | Unsecured car loans |
|---|---|---|
| Interest Rate | Lower (5-8%) | Higher (8-15%) |
| Collateral | The car secures the loan | No collateral required |
| Loan Amount | Up to 100% of the car value | Usually lower amounts |
| Approval Requirements | Easier to qualify | Stricter credit requirements |
| Risk to Borrower | The car can be repossessed | No asset risk |
| Loan Terms | Up to 8 years | Usually 2 to 5 years |
Unsecured car loans
With unsecured car loans, the vehicle is not used as collateral, meaning that the lender cannot automatically repossess your car in case you default on payments.
They can, however, take legal action to recover the debt. The interest on these loans is generally greater since it is a riskier loan to the lender.
To get an unsecured car loan, you will have to have excellent credit (700 or higher). Application can be quicker, and you also have a wider choice of the car you want, as the lender does not have an interest in the value of the car you are taking as security.
Secured car loans
Secured car loans are offered by using the car as collateral, so in case of defaulting on the payments, the lending company can repossess the car.
It is this lowered risk that enables the lenders to charge lower interest and extend the repayment period. In Canada, most traditional car loans are secured loans.
Until you have fully paid the loan, the lender has a lien on the title to the vehicle.
This implies that you cannot sell the car without first paying the loan financing company, or assigning (transferring) the loan to the new buyer. With fair credit, it is easier to get secured loans.
How to get a car loan
- Check Your Credit Score First: Get free reports from Equifax and TransUnion Canada to know where your credit score stands and fix any errors before applying
- Calculate Your Budget: Use the 20/4/10 rule – 20% down payment, finance for no more than 4 years, and keep total monthly vehicle expenses under 10% of income
- Get Pre-approved: Apply with multiple lenders within a 14-day window to compare offers and see what will work without hurting your credit score
- Gather Required Documents: Prepare proof of income, employment verification, bank statements, and identification before applying
- Shop Around for Rates: Compare offers from banks, credit unions, online lenders, and dealerships to find the best car loan rates
- Read the Fine Print: Review all terms, including interest rate, payment schedule, fees, and penalties, before signing
- Make a Down Payment: Putting money down reduces your loan amount, monthly payments, and total interest paid over the loan term
How long does it take to get a car loan?
The approval of a car loan can take only a few minutes for online pre-approvals, whereas the entire procedure requires 1 to 3 business days.
Pre-approval grants you approval subject to the condition of the information you give, and final approval is when verification of documents is done. You may be approved the same day that you apply online with digital document upload.
It may take 3-7 business days before your application is processed by the traditional banks and credit unions that require in-person visits or documents that are sent via mail.
Dealership financing has the fastest approvals, and they may be able to get you approved in hours. The dealership rates are not the lowest, though, so it may be worthwhile comparing with your pre-approved rates.
Where can I get a car loan in Canada?
| Type | Interest | Pros | Cons |
|---|---|---|---|
| Banks | 5-9% | Established reputation, branch locations | Stricter requirements, slower process |
| Credit Unions | 4-8% | Lower rates for members, personal service | Membership required, limited locations |
| Private Lenders | 6-15% | Flexible terms, faster approval | Higher rates, less regulation |
| Dealerships | 0-12% | Convenient, promotional rates | It may not be the best rate, sales pressure |
Banks
Major Canadian banks like RBC, TD, Scotiabank, BMO, and CIBC all offer car loans. They typically have competitive rates for customers with good credit and existing banking relationships.
Banks offer both pre-approval and direct financing at the dealership.
Bank car loans often come with additional benefits like payment deferrals during financial hardship or the ability to make extra payments without penalty.
However, they usually have stricter approval requirements and may take longer to process applications.
Credit unions
Credit unions often offer some of the best car loan rates in Canada, sometimes 1-2% lower than banks.
You need to become a member first, which usually requires living or working in their service area or meeting other membership criteria.
Credit unions provide more personalized service and are often more willing to work with members who have unique financial situations.
They may approve loans that larger banks would decline, especially if you have a relationship with them.
Private lenders
Online private lenders and alternative financing companies can provide car loans when traditional lenders won’t approve you.
They specialize in bad credit car loans and low credit car loans, but charge higher interest rates to offset the risk.
These lenders often have faster approval processes and more flexible qualification requirements.
However, you’ll pay more in interest, and some may have less favourable terms or higher fees than traditional lenders.
Dealerships
Car dealerships work with multiple lenders and can offer financing on the spot. They sometimes have access to manufacturer promotional rates like 0% financing for qualified buyers.
The convenience of getting your loan and car in one place is appealing to many buyers.
However, dealerships may mark up the interest rate they receive from lenders to make additional profit.
Always compare dealership offers with your pre-approved rates to ensure you’re getting the best deal.
What are the best car loans in Canada
When trying to take out a car loan in Canada, it’s important to explore the best options, so here are the best car loans in Canada:
| Lender | APR range | Amount | Term | Min. credit score |
|---|---|---|---|---|
| Smarter Loans | 5.9-29.9% | $5,000-$50,000 | 2-7 years | 550+ |
| DealerHop | 6.9-19.9% | $10,000-$75,000 | 2-8 years | 600+ |
| Loans Canada | 5.99-35.99% | $1,000-$50,000 | 1-7 years | 500+ |
| CarLoans411 | 7.9-24.9% | $5,000-$100,000 | 3-8 years | 580+ |
These online platforms connect you with multiple lenders to compare car loan offers. Each has different qualification requirements and specializes in different types of borrowers.
Smarter Loans and Loans Canada work with borrowers who have poor credit, while DealerHop focuses more on prime borrowers.
The rates shown are ranges based on credit score, loan amount, and term length.
Your actual rate will depend on your specific situation. These platforms don’t charge fees to borrowers; they’re paid by the lenders when you accept a loan offer.
What affects car loan rates?
Many factors affect car loan rates in Canada. Here are some factors that might affect car loan rates:
- Credit score: Your credit score is between 300 and 900, and it is an indication of your creditworthiness. The better your Canadian credit score, the less your interest rate. The best rates are offered to scores above 750, while higher rates are offered, or co-signers are needed for those with credit scores below 600.
- Income: A standard guideline that lenders follow is to never allow car payments that exceed 18 percent of your monthly gross income. The advantage of having a higher income is that you can get a bigger loan amount and at better rates because you are perceived to be more capable of paying it off.
- Employment: A Stable employment history shows lenders you have reliable income. Self-employed borrowers or those with irregular income may face higher rates or stricter documentation requirements. A job tenure of 2+ years is preferred by most lenders.
- Credit history in Canada: Having a Canadian credit history is important even if you have good credit in another country. New immigrants may need to start building credit from scratch or provide additional documentation. Some lenders offer newcomer programs with special rates.
- Down payment: Larger down payments reduce the lender’s risk and can qualify you for better rates. Putting down 20% or more often unlocks preferred pricing tiers and may eliminate certain fees.
- Loan term: Shorter loan terms usually have lower interest rates but higher monthly payments. Longer terms cost more in total interest but have lower monthly payments.
What do you need to get a car loan?
There are requirements that must be met and provided before you can get a car loan in Canada. Here are the things you need to get a car loan:
- Proof of identity: Valid Canadian driver’s license, passport, or other government-issued photo ID to verify your identity and legal status in Canada
- Proof of income: Recent pay stubs (usually last 2-3), T4 slips, employment letter, or tax returns if self-employed. Some lenders accept disability or pension income
- Employment verification: Letter from employer confirming your position, salary, and length of employment. Self-employed borrowers need business registration and financial statements
- Banking information: Recent bank statements (3-6 months) showing your account activity, deposits, and current balances to verify financial stability
- Residence proof: Utility bill, lease agreement, or mortgage statement confirming your current address and how long you’ve lived there
- References: Personal and professional references who can vouch for your character and reliability, including contact information
- Vehicle information: If you’ve chosen a specific car, you’ll need the VIN number, purchase agreement, and vehicle history report for final approval
- Down payment funds: Proof that you have the down payment available, whether from savings, trade-in value, or other legitimate sources
How to use a car loan calculator
Using a car loan calculator might help you get the best car loan rates. Here’s how to simply use one:
- Enter the vehicle price: Input the total cost of the car you want to buy, including taxes and fees. This gives you the base amount you’ll need to finance
- Add your down payment: Enter how much money you can put down upfront. Higher down payments reduce your loan amount and monthly payments significantly
- Select loan term: Choose the length of time you want to pay back the loan, typically 3-7 years. Shorter terms mean higher payments but less total interest
- Input interest rate: Use the rate you’ve been quoted or an estimated rate based on your credit score. Even small rate differences significantly impact your total cost
- Review monthly payment: The calculator shows your estimated monthly payment, including principal and interest. Make sure this fits comfortably in your budget
- Calculate total interest: Look at the total interest you’ll pay over the loan term. This helps you understand the true cost of financing versus paying cash
- Compare scenarios: Try different down payment amounts, loan terms, and interest rates to see how they affect your monthly payment and total cost
- Factor in other costs: Remember, the calculator only shows loan payments. Add insurance, maintenance, gas, and registration costs for your true monthly vehicle expense
What happens after you get a car loan
After your approval, you will be given a loan agreement detailing all the terms, such as the interest rate, the amount you will pay monthly, the date you will pay the loan instalment, and the date the loan will mature.
Signing this, read carefully, as it becomes a legally binding contract. The lender will either give you a check to buy the vehicle or they will direct the payment to the dealership.
In case you are purchasing through an individual seller, then you may require a certified check or a bank draft.
Until you pay off the loan, the lender puts a lien on the title of the vehicle, meaning they have legal claims to the car.
The initial payment is normally expected within 30 to 45 days of receiving the loan funds; therefore, it is advisable to have automatic payments to ensure you never miss a payment date, as late payments will affect your credit score and may attract a fee.
To manage your account, most lenders provide internet account management that allows you to check your balance, payment history and make a payment.
Store all your loan documentation in a secure place and make sure you have full auto insurance coverage as stipulated in your loan contract. Your insurance policy must show the lender as a lienholder.
Inform your lender on time in case of a change of address or contact details.
How to manage a car loan
You should always ensure that you make your payments before the due date each month in order to have good credit and to avoid the late charges.
You can also have your bank account automatically pay them so that you never have to miss a due date. Pay a few days in advance to cater for processing and weekends.
Also, consider making extra payments toward the principal when possible. Even an extra $50 per month can significantly reduce the total interest you pay and help you pay off the loan faster.
Check if your lender charges prepayment penalties before making extra payments. Keep your car properly maintained and insured throughout the loan term. The lender requires comprehensive and collision coverage to protect their investment.
Maintain detailed service records, as a well-maintained car retains more value. Lastly, monitor your loan balance and the car’s value to avoid owing more than the car is worth.
If you need to sell the car before paying off the loan, you’ll need to cover any difference between the sale price and the loan balance.
How to refinance a car loan
Car loan refinancing involves taking a new loan with better terms to pay off your existing car loan. This can lower your monthly payment, reduce your interest rate, or change your loan term.
You might consider refinancing if your credit has improved, interest rates have dropped, or your financial situation has changed.
The best time to refinance is when you can get an interest rate that’s at least 1-2% lower than your current rate. Your car should still have substantial value – most lenders won’t refinance cars older than 7-10 years or with high mileage.
Start by checking your current loan balance and your car’s current value. Apply with multiple lenders to compare offers, including banks, credit unions, and online lenders.
You’ll need similar documentation to your original loan application. Keep in mind that refinancing resets your loan term, so you might pay more total interest even with a lower rate if you extend the term.
Some lenders charge application or origination fees for refinancing, so calculate whether the savings outweigh these costs. Also, consider how much longer you plan to keep the car before refinancing.
