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While used cars have a lower price tag than new cars, they can still be very expensive. Depending on the year, make, model and overall condition of the car, a used car can cost $34,031, on average. Given that used cars can be expensive, we have everything you need to know about financing a used car in Canada.

Financing A Used Car In Canada, Can You Do It?

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. In general, financing a used car through a dealership is the most common method of financing. However, you can also finance a used car by taking out a car loan through a bank or alternative lender. 

You can even take out a personal loan to finance a used car, though the rates may be higher because it’s unsecured. 

Can You Buy A Used Car Online? 

Yes, in Canada, you can buy a used car online. You can purchase a car online from the car manufacturer, a dealership or an online used car dealer like Clutch

With Clutch, 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). 

How Financing A Used Car In Canada Works

While there are a few ways to finance a used car, the majority of Canadians go about securing a car loan through a bank, alternative lender or through the car dealership itself. 

Step 1. 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% of your income on your car payments. 

Step 2. Compare Car Loan Options

Before going to a dealership or picking a car online, get pre-approved for a car loan. This will allow you to compare offers and choose the one that best works with your finances. While banks offer the best rates, your income, debt, and credit scores will also need to be in good condition. If not, apply with an alternative lender. Their rates may be higher, but their requirements and terms are more flexible. 

Step 3. Buy Your Used Car

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 fund to finance your used Car.

Financing A Used Car Through A Bank

Acquiring a loan through a bank can be tough, but it will offer the best rates. Even if you don’t qualify for a loan through your bank, you can always get financing through a credit union or alternative lender.

The Advantages Of Financing A Used Car Through A Bank

May Have More Tolerance For Late Payments

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. 

If you’ve had a good record with your bank, they may be more lenient if you miss a payment or two. While they’ll likely charge you a penalty fee, they won’t immediately send a debt collector after you and repossess your vehicle.

Flexible Payment Terms

Most banks are 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 Financing A Used Car Through A Bank

Strict Requirements

Banks have stricter rules and regulations for their lending process than dealerships and alternative lenders. Generally, banks require their borrowers to have favourable credit before granting them a car loan, even if it’s for a used vehicle. 

Slow Funding Time

Banks have a longer underwriting process compared to dealerships and alternative car loan lenders. As such, you won’t receive your loan right away. The approval process takes several business days to go through, no matter how good your credit happens to be. 

With a dealership, 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 hands by the end of the day. Just like with banks, however, dealership financing does have its advantages and disadvantages. So, before you go running toward 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

Convenience

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.

Open To Negotiating

Once again, car dealerships are businesses and they want to sell their products. While not all dealerships will necessarily offer better interest rates right off the bat. But, 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.

Bad Credit Often Accepted

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

Fewer Payment Options

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.

Potential For Higher Interest Rates

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.

Overall Higher Cost

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.

Which Financing Option Is Better For Your Next Used Car?

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 advantages and disadvantages. Plus, everyone has a preference when it comes to choosing a lender to work with.

The choice really depends on your own financial situation. If you have a credit score that’s less than favourable, chances are you’ll have an easier time getting financing through a dealership. If your credit is favourable and your income is solid. Maybe your bank will give you good a deal. Then again, whatever “good deals” are offered by banks or car dealerships may simply be the convincing tactics of the most charming salesperson.

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. Remember, your financial health should always take priority. If you’re in the market to purchase a new or used vehicle, Loans Canada can help. We’ve partnered with lenders all over Canada who can help you get behind the wheel of a car that’s right for you. 

Finance A Used Car FAQs

What’s the difference between a fixed car rate and a variable car 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.

What credit score do I need to secure a car loan? 

Your credit score can be the difference between you getting approved or denied for various credit and loan products. As such, the higher your credit score, the better your chances of qualifying. That said, you can still qualify for a car loan with bad credit, particularly with alternative lenders, so long as your overall finances are in good shape.

Can I get a car loan to purchase a used car from a private seller?

Yes, you can get a car loan for a private sale. You can simply apply for a car loan or personal loan with a bank or alternative lender and then used the fund to purchase the car.
Bryan Daly avatar on Loans Canada
Bryan Daly

Bryan is a graduate of Dawson College and Concordia University. He has been writing for Loans Canada for five years, covering all things related to personal finance, and aims to pursue the craft of professional writing for many years to come. In his spare time, he maintains a passion for editing, writing screenplays, staying fit, and travelling the world in search of the coolest sights our planet has to offer.

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