While used cars have a lower price tag than new cars, they can still be very expensive. Given the high cost, you might still need to finance your purchase if you don’t have the liquid funds available to purchase a car outright. Read on to find out more about how to finance a used car in Canada.
Key Points
- You can buy a used car from a used car dealership or from a private seller.
- You can finance a used car with a private seller by opting for a private party auto loan or a personal loan.
- If you purchase a used car from a dealership, you may be able to finance it through in-house dealership financing or a car loan from a bank or private lender.
Can You Finance A Used Car In Canada?
Yes, there are a few different ways you can finance a used car in Canada. The method you choose to finance the used car depends on your needs and ability to qualify.
- Car loan: You can apply for a car loan directly from your bank, with a dealership through their in-house financing, or with an alternative or private lender. Car loans are designed specifically to cover the cost of a vehicle purchase with the car used as collateral.
- Personal loan: Alternatively, you can apply for a personal loan, and the funds can be used for all types of purposes, including paying for a car. You’ll be provided with a lump sum of money that is to be repaid via installments over a set term. You can then use the funds to pay for a used car in cash, whether you buy from a dealership or private seller.
| What If I Have Bad Credit? If you have bad credit, you may have better luck applying for auto financing through a private lender or dealership. These lenders have less stringent loan criteria and often approve borrowers with bad credit. That said, the loan will likely come with higher interest, and the loan amount may be lower. Learn more: Bad Credit Car Loans Canada |
Best Car Loans In Canada
Used Car Loan Features
It’s helpful to understand the features of a used car loan before you apply so you know what factors affect the overall cost of your loan:
| Loan Amounts | $6,000 — $50,000 |
| Terms | 24–84+ months |
| Interest Rates | 5% — 9%+ |
| Down Payment | 10% — 20% of the car price |
Learn more: Should You Get A Loan For A Used Car?
Can You Buy A Used Car Online?
Yes, in Canada, you can buy a used car online. You can purchase a car online from a dealership or an online used car dealer like Clutch or AutoTrader.
With Clutch, for instance, you can not only pick a car from their inventory, but you can also apply for financing through them. This makes them a one-stop shop for purchasing a used car. Moreover, if you don’t like the car, you can return it without penalty when returned within 10 days (on select packages).
Before purchasing a used car online, be sure to shop with a legitimate source, use a secure payment method, and request a detailed vehicle history report.
Types Of Used Car Financing Options In Canada
There are multiple ways you can finance a used car in Canada. You can opt for a car loan, private party auto loan or a personal loan.
Car Loans
If you’re purchasing a used car from a dealership, a car loan is your best option. You’ll not only get financing but also gain access to any dealership deals or certified pre-owned vehicles.
Car loans are available through dealership in-house financing, banks, credit unions and private lenders. Whether you’re looking for bank financing or financing from a private lender, you generally must apply with the dealership they’re partnered with and ask for your specific lender’s financing.
For example, if you’re looking for Scotiabank car financing, you can visit one of the 4000 dealerships they’re partnered with and ask for Scotiabank financing.
Learn more: Best Car Loans In Canada
Private Party Auto Loans
If you’re purchasing a car from a private seller, you’ll generally need to apply for a private party auto loan. This option works like a regular car loan, except it allows you to purchase a car from a private seller. With this loan, you directly apply with the bank or private lender.
Like a regular car loan, there are restrictions on the type of vehicle you buy, such as the age and condition. Moreover, with a private party auto loan, you can usually only borrow up to $50,000.
Learn more: Private Party Auto Loans
Personal Loans
You can also apply for a personal loan to finance a car. This is particularly useful if you’re buying a used vehicle from a private seller. Armed with the funds from a personal loan, you can essentially shop like a cash buyer.
However, since personal loans are usually unsecured, interest rates are higher than a car loan. Moreover, the amount you qualify for may be less than what you can get with a car loan. That said, a personal loan is less risky and offers a lot more flexibility, as there are no restrictions on the type of car you buy.
Learn more: Best Personal Loans In Canada
Should You Get A Used Car Loan With A Dealership, Bank Or Private Lender?
There are pros and cons to securing a car loan through a bank, a private lender, and through the car dealership itself.
Financing A Used Car Through A Bank
Acquiring bank financing for a used car can be tough, but it will offer the best rates. You’ll typically need good credit and a strong income to qualify.
Advantages Of Financing A Used Car Through A Bank
- Payment Relief: Most banks offer options to skip 1-2 payments a year.
- Flexible Payment Terms: Most banks offer terms up to 8 years (96 months), so you can customize your payments according to your needs.
- Better Rates: Banks are known for providing lower rates compared to private lenders.
- No prepayment penalty: Most banks allow you to repay your loan at any time without penalty.
Disadvantages Of Financing A Used Car Through A Bank
- Strict Requirements: Banks generally require their borrowers to have favourable credit before granting them a car loan, even if it’s for a used vehicle.
- Car Restrictions: If you’re looking at a car that’s over 5 to 8 years old, it may not be eligible for financing.
- Minimum Loan Amount: Many banks have minimum loan amounts ranging from $4,000 to $7,000.
In-House Financing Through A Dealership
With in-house financing from the dealership, the car dealer essentially serves as the lender by providing you with the funds needed to purchase the vehicle they just sold you. Then, you make installment payments to the dealership until the loan is fully repaid.
Advantages Of Dealership In-House Financing
- Convenience: The application and approval process will be less time-consuming, allowing you to find a car and finance it all in one place.
- Open To Negotiating: Car dealerships may 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.
- Bad Credit Often Accepted: Since they’re trying to move their inventory, dealerships may be more inclined than banks to finance used cars for drivers with bad credit.
Disadvantages Of Dealership Financing
- Limited Vehicle Selection: In-house financing is tied to the car dealership, so you’ll only be able to buy a vehicle from that specific dealer, giving you fewer options.
- Potential For Higher Interest Rates: Since they need to make as much from you as possible, interest rates at the dealership may be higher than a bank’s. That said, you may get a decent rate if you finance during promotional periods.
Financing Through A Private Lender
Private lenders are widely available in Canada. You can generally access financing from a private lender by applying with them directly or by working with a dealership they’re partnered with.
Advantages Of A Private Lender
- Accepts Bad Credit: Private lenders often work with bad credit borrowers or those with unconventional financial situations. So, you won’t have to jump through as many hoops to secure funding.
- Faster Application Process: The application process is typically very quick and streamlined, and simply requires a few pieces of information about yourself and your financing needs, which you can typically take care of online within a few minutes
- Fast Funding: Depending on your application, you can get approved for financing within minutes, with funding to come shortly after, often on the same day as approval.
Disadvantages Of A Private Lender
- Higher Interest Rates: If you’re considered a risky borrower with low credit, you’ll likely be charged a much higher rate of interest compared to financing from traditional banks. This will make your loan more expensive over the long run.
- Shorter Loan Terms: Some alternative lenders offer short-term loans to offset the risk of lending to riskier borrowers. This can translate to higher monthly payments, and the loan itself may be more difficult to pay off.
- Less Regulation: Unlike big banks that are subject to strict regulations, alternative lenders may not have to adhere to such regulations.
Are You Eligible For Used Car Financing?
Lenders who provide used car loans typically look at several key components to assess your ability to qualify, including the following:
- Income: Your income must be adequate enough to cover your car loan payments, without interfering with your current bills. You may need to show pay stubs or a letter of employment as proof.
- Debt: Your current debt load must not be too high, otherwise you may not have enough income left over to cover your loan payments. Lenders often measure your monthly income relative to your debt, known as your debt-to-income (DTI) ratio, to determine whether you can qualify for a loan.
- Credit Score: To assess your creditworthiness, the lender may want to look at your credit score, which indicates your likelihood of making timely car loan payments. The higher your credit score, the better.
- Vehicle: Since the vehicle is being used as security for the loan, the lender will want certain details about it, including the make, model, year, mileage, and condition. If you default on the loan, the lender may repossess and sell the car to recoup their losses, so they’ll want to make sure that it’s valued high enough to cover the remainder of your loan payments.
Learn more: What Do Lenders Look For When Offering Private Sale Financing?
Tips On Financing A Used Car In Canada
If you’re looking to finance a used vehicle, consider the following tips:
Get A Pre-Purchase Vehicle Inspection
A pre-purchase vehicle inspection will give you details about the car’s condition before you commit to buying it. This can help you avoid unpleasant and expensive surprises down the road. These reports can reveal issues such as mechanical problems, previous damage, or other safety concerns that you might not notice by test driving the car.
Understand Your Budget
Before comparing car loan options, it’s best to understand how much you can afford on a monthly basis. As a rule of thumb, it’s recommended that you spend no more than 10% to 15% of your income on your car payments.
Don’t Forget About Sales Tax
In most cases, you’ll need to pay sales tax on your vehicle purchase. The applicable sales tax rate depends on the province you’re buying the car in and whether you’re buying from a dealership or private seller. You can pay the sales tax upfront, or add it to the total loan amount and finance it.
Learn more: Taxes On Cars In Canada: Dealership vs. Private Sale
Check Your Credit Score
Your credit score plays a big role in your ability to get financing for a vehicle purchase. A good credit score can increase your chances of loan approval with a better rate, while a lower score can make it more difficult to get approved.
It’s best practice to check your credit score before applying for a car loan. You can check it for free with the credit bureaus and several online platforms such as Loans Canada’s CompareHub.
Get Pre-Approved
You can find used cars at your local dealership or through online retailers like Clutch. Once you know which car you have, you can use the car pre-approval to secure a loan through your bank or an alternative lender. Or you can choose to apply with your dealership. Once approved, you can use the funds to finance your used car.
Alternatives To Financing A Used Car In Canada
Aside from financing your vehicle purchase with a car loan, there are other alternatives to consider:
Leasing
A car lease allows you to use a vehicle for a set time period rather than owning it. After the lease term ends, you can either trade it in for another vehicle or buy it at a previously-agreed upon price. Lease payments are typically lower than car loan payments, but you won’t be contributing to equity in the vehicle.
Learn more: Can You Lease A Used Car In Canada?
Paying In Cash
Paying in cash for a used car is an option if you have liquid funds available to cover the full price. This option helps you avoid interest charges and take full ownership right away. It may also help you secure a lower price for the vehicle, helping you save money. Plus, there are no monthly loan payments to deal with.
Bottom Line
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. Take your time, be patient, and really think things through before buying a car just because of the way it looks.
