How Car Loans Work in Canada

A car loan is a way to purchase a new or used vehicle when you lack the cash to buy it outright. Car loans are available from banks and credit unions, as well as online lenders.

A car is one of the highest-dollar purchases many Canadians ever make. If you haven’t saved up enough money to buy a car outright, you’ll need to finance it using a car loan.

Understanding common car loan options before you start vehicle shopping is crucial to ensure you choose the best option for your needs and budget.

What is a car loan?

A car loan is a sum of money you borrow from a bank, credit union, car dealership or online lender to fund the purchase of a new or used vehicle.

Car loan debt, plus any fees and interest, are repaid by making regular payments over a set period of time. If you default on the loan, the lender can repossess the car to cover the remaining balance.

In general, to get a loan to buy a car (sometimes called auto or vehicle financing), you’d either ask your financial institution for a loan (or possibly a line of credit) or go with a financing plan offered by the car dealer at the time of purchase.

Car loan vs. lease

Instead of getting a car loan, which allows you to purchase a vehicle and eventually own it outright, some people may opt to lease.

Leasing a car is a lot like renting it — but for a longer period of time. You don’t own the vehicle but you can drive it for the length of your lease. During that time, you make monthly payments and are responsible for maintenance costs.

At the end of the term, you have the option to return the car to the dealer and walk away — as long as you’ve abided by the terms of the lease agreement or you may face penalties. Terms may include annual mileage caps and charges for excessive wear and tear.

Leasing a vehicle instead of buying one with a car loan could mean lower monthly payments and the chance to get a new vehicle every few years. However, you won’t build up equity in your car and you can face high penalties if you go over the agreed-upon mileage or if the car shows more wear than the dealer deems “normal.”

How car loans work

Once you’ve shopped around and selected the vehicle you like, you fill out an application for a car loan. While applying for a car loan at the dealership is a common route, you can also apply for a car loan directly via a bank or, in some cases, online.

To get a car loan, you’ll likely have to provide copies of pay stubs, income tax assessments (for proof of income), a valid Canadian driver’s license and other documents.

Car loan eligibility requirements

The eligibility standards for a car loan vary by provider, but you likely have to meet some basic requirements, including:

Be a resident of Canada.
Have a Canadian driver’s license.
Be the age of majority in your province or territory.
Have proof of income (some lenders may have a minimum income requirement).
Have a good credit score (though some lenders, such as online lenders, may give car loans to those with a history of bad credit).

It’s possible to get preapproved for a car loan by a bank before making a purchase. At a car dealership, approval may or may not happen quickly. The lender will need to confirm your information and do a credit check to make sure you can manage car loan payments, which could take hours or a few days.

You’ll then return to the dealer and be presented with potential loan options. Carefully review the loan offers, paying special attention to interest rates, fees, duration of the loan and repayment terms so you can understand your options and pick the best loan for your needs.

Next, you’ll sign the loan agreement, which clearly sets out how much principal and interest you will owe.

Finally, you take possession of your new car and drive it as long as you make the agreed-upon monthly payments. Once the loan is fully repaid, you’ll have complete ownership of the car. However, if you default on your payments, the lender can repossess the vehicle.

Interest rates

To ensure that you’re getting a reasonable loan offer, it’s a good idea to figure out what your overall interest payments would be over the course of the loan.

Numerous bank and lender websites feature car loan calculators where you input details like the cost of the car, the interest rate and the duration of the loan. The calculator then shows you what your monthly payments could be, as well as the total interest amount you may pay over the course of the loan.

Loan terms

Another important consideration when looking for car loans is the term or duration of the loan. In Canada, car loan terms typically range from 36 to 72 months, with some terms as long as 84 months.

Choosing a shorter term makes your monthly payments higher but saves you money in the long run. A longer term can mean lower monthly payments, but you pay more in interest — meaning that your car could wind up costing you more than you expected.

Where to get a car loan in Canada

There are three main places to get a car loan in Canada.

Through a bank or financial institution: While car loans from banks tend to come with higher interest rates than loans through a dealership, some banks don’t require a down payment. This could be an advantage over dealership car loans, which often require you to put money down, which lowers the amount of your loan. You may also be eligible for better rates or discounts on fees if you have a pre-existing relationship with the bank. However, it can be hard to get approved for a loan with a bank if you have bad credit.

Directly from the car dealer: Many car dealerships may arrange loans through financing divisions of the vehicle manufacturers or may arrange for a loan on your behalf from one or more banks so they can present you with multiple loan offers. Loans from car dealers may have better interest rates than what you’d get if you applied at a bank yourself, but they may require that you provide a down payment.

From an online lender: Finding a car loan online can be an option for buyers who can’t get a loan from a bank or the dealer, typically because of a poor credit score. Unfortunately, these less-traditional car loans may come with higher interest rates that can make it difficult to manage car payments.

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