How to Finance a Used Car in Canada

Written by Bryan Daly
Fact-checked by Caitlin Wood

How to Finance a Used Car in Canada

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Car Car Financing Car Loan Used Car

In Canada, financing a brand new car is not something everyone can afford to do. So, it’s common for a lot of drivers out there to buy their vehicles from dealerships that sell used cars. With a used car, they’ll have transportation from point-A to point-B, but they won’t have to worry as much about the wear n’ tear a Canadian car goes through, or the price tag that comes with it. That being said, when we’re talking about used cars, for the most part, we mean something a little bit more pricey than your grandmother’s 1999 Corolla. Often, when a used car requires consumer financing in order to be purchased, it’s because the car itself is only a few years old and has relatively low mileage.

What is a certified pre-owned vehicle? Find out here.

Despite the initial price tag being lower than that of a new vehicle, there are a few other factors that should be considered before pen hits paper. Don’t worry, we have a few pointers for you, if and when you’re in the market for a used vehicle.

Ways to Finance a Used Car

Strictly speaking, there are two ways that the majority of Canadians go about securing a loan to finance a used car, through a bank or through the car dealership itself. Again, we’re assuming here that you’re not just buying a $1,000 fixer-upper from a private seller on Kijiji, but instead looking to acquire a lightly used car that’s less than 10 years old and has less than 100,000 kilometres on the odometer. Each financing option comes with its own benefits and drawbacks and choosing the option that’s right for you can depend on a number of different factors.

Actually, as is the case with many types of loans, one of the most significant factors that will determine your likelihood of approval will be the health of your credit. As we’ve discussed in many of our other articles, your credit score can be the difference between you getting approved or denied for various credit and loan products. And, for the first financing option especially, it may be the difference between you getting your used car or not.

Do you need a bad credit car loan? Read this for more information.

A Word About Interest Rates

Before we get to the financing options for used cars, we first have to discuss the topic of interest rates. Being that affordability is probably the biggest issue that most people face when they’re thinking of buying a car, regardless of whether it’s new or used, which institution offers the best interest rates can make or break a deal quickly. So, when it comes to interest rates, it’s very important to do a lot of research, because every bank, dealership or otherwise is going to offer different rates for every year, make and model of car they have available. While the vehicle itself might be so great that you’re tempted to buy it without asking questions, choosing the wrong rate can certainly be bad for your financial stability.  

For example, when talking to a bank or dealership, you need to ask them whether they offer a “fixed” or “variable” interest rate. A fixed rate means that the interest rate will remain the same, no matter how many years it takes you to pay off the full loan amount. A variable or “floating” rate will fluctuate according to the market premium, so when the market interest rate shifts, your rate will go with it. Regardless of which financing option you decide on, always remember that both banks and dealerships are businesses. They want to make a profit from their clients and will find ways to do so, no matter how much sugar coating they add along the way. This isn’t to say that both forms of financing are bad, it’s just something that needs to be considered before settling on the first place that offers an appealing interest rate.

For more detailed information about interest rates, read this.         

Financing Through a Bank

The first option for financing a used car is as close to home as you can get, acquiring a loan through a bank. While you might be thinking of choosing the bank you’re currently with, know that different banks will offer different rates, so it can be beneficial to shop around a bit before making your decision. Even if your bank doesn’t offer a reasonable enough rate for a used car loan, you can always get financing through a separate banking institution or credit union.

The Advantages of Bank Financing

• One of the major benefits of choosing a bank for your used car loan is that if you’ve been there for several years, you’ll likely have established a good relationship with them. You can go there anytime during business hours, discuss the situation with a financial advisor and get better advice than a car salesman may give you.
• Your bank will be a bit more reasonable during the payment process. Let’s say you’ve missed a couple of payments. True, this is certainly not a good practice to keep up, since missed payments will damage your credit score and both banks and dealerships can seize your car if you default for too long. However, your bank will probably be more lenient if you should miss a payment or two, especially if you’ve had a good record with them otherwise. They’ll likely charge you a penalty fee, but won’t immediately send a debt collector after you.
• Most banks are also open to negotiating the terms of your payment period. They’ll want to keep you on as a client, so if you can’t afford the monthly payments you have now, you should be able to negotiate a lower payment and draw out the term of your loan for a while longer. And vice versa, if you want to accelerate your payments by switching them to bi-weekly instead of monthly, or raise the amount you’re paying so that your term is shorter, your bank shouldn’t have a problem.

The Disadvantages of Bank Financing

• Because of the depreciation in value that used cars will have, banks are more wary about offering to finance used cars. While the value of a new car also has the tendency to depreciate, banks tend to grant loans for them with less apprehension.   
• Banks have stricter rules and regulations for their lending process than dealerships will. So, banks require their borrowers to have favorable credit before granting them a car loan, even if it’s for a used vehicle. So, if you have bad credit, dealership financing will be the easier option.
• Since their regulations are more strict, they likely won’t be open to changing their interest rates at all. What you see is what you get.
• You won’t necessarily receive your loan right away, since the approval process takes several business days to go through, no matter how good your credit happens to be. When you get dealership financing, you can buy your car and drive it off the lot within the same day.      

Financing Through a Dealership

The second option is to finance your used car through the dealership itself. Potential borrowers can walk in, shop around for cars, take a test drive, sign some contracts, and have the keys in their hand by the end of the day. Just like with banks, however, dealership financing does have its advantages and disadvantages. So, before you go running towards the nearest car lot with an inflatable tube-man waving out front, it’s important to consider what’s best for your financial situation.   

The Advantages of Dealership Financing

• The most significant advantage of in-house dealership financing is, of course, the convenience factor. As we mentioned above, the application and approval process will be less time consuming, allowing you to find a car and buy it almost immediately. You won’t have to find a car, then go to the bank and wait for them to approve or reject you.  
• Once again, car dealerships are businesses and they want to sell their products. While not all dealerships will necessarily offer better interest rates than the common banking institution right off the bat, they will likely be open to negotiating a more reasonable rate in order to close the deal. They may even throw in some bonuses such as a longer warranty or other upgrades to sweeten the deal.   
• Since they’re trying to move their inventory, dealerships are also more inclined than banks to finance used cars for drivers with bad credit. Even if you’ve gone through a recent bankruptcy, you shouldn’t have as hard of a time getting dealership financing as you would getting financing through a bank.

The Disadvantages of Dealership Financing

• As we mentioned in the previous section, banks will be a lot more reasonable when it comes to your payment schedule. Dealerships, on the other hand, usually won’t allow you to deviate from your payment plan at all. This means no accelerated payments, no lump sums, and much less tolerance when it comes to missed payments.
• Since they need to make as much from you as possible, interest rates at the dealership may actually be higher than a bank’s. Just because the salesperson has a smile on their face, doesn’t mean they’re going to give you the best possible deal.
• When financing a used car through a dealership, you could actually end up paying more than the car is worth a few years down the road. Most dealerships will charge you a hefty down payment first, on top of the monthly payments and interest rates. So, by the time you’ve paid off your loan, you may have paid double the value of the car.        

For more pros and cons of in-house dealership financing, click here.  

Which Financing Option Is Better?

Between the two financing options for used cars, it can be tough to come up with an exact response to a question that so many drivers have. Each option has its upsides and downsides and everyone has a preference as to the way they choose to go about paying off their loans. The choice really depends on your own financial situation. If you’ve got a credit score that’s less than favorable, chances are you’ll have an easier time getting financing through a dealership. If your credit is favorable and your income is solid, maybe your bank will give you good a deal. Then again, whatever “good deals” offered by banks or car dealerships can simply be the convincing tactics of the most charming salesperson.

It’s extremely important that, if you’re trying to finance a car of any kind, you discuss the situation properly, read the fine print, and realize what you could be getting yourself into. A car is a big responsibility, no matter what condition it’s in. It’s an investment that can and will cost you a lot of money in the long run. If your payment period is not properly managed, you could end up paying twice as much as the car is actually worth, even more with the way that a car’s value can depreciate over time. In fact, even a brand new car loses a lot of value the minute you drive it off the lot. Take your time, be patient and really think things through before buying a car just because of the way it looks, or the “special deal” the salesperson offers. Remember, your financial health should always take priority.