Buying a car can be both an exciting and stressful time. While choosing the type of car and features you want can be fun, figuring out how you’ll finance this purchase can be daunting. Knowing your financing options can help smooth the process and save you money along the way.
What Is A Car Loan?
A car loan is basically a personal loan that is secured by the car you are purchasing. Meaning, if you default on your loan payments, the lender has the authority to seize your vehicle as collateral.
Most lenders will allow you to borrow from 80% to 100% of the value of the car. You’ll make regular payments plus interest over an agreed-upon period. Payments can usually be made weekly, bi-weekly, monthly, or semi-monthly, depending on your lender.
Car Loan Features You Can Expect
| Car Loan Amount | 80% – 100% of the car value |
| Car Loan Term | 12 – 96 months |
| Car Loan Interest Rate | 6% – 8% on average, but can go as high as 35% |
| Down Payment Requirement | 20% is recommended, but there are lower options, with some offering zero-down car loans |
Can You Use A Car Loan To Buy A Used Car?
Yes, you can use a car loan to purchase a used car from a dealership or private seller. However, there are usually certain conditions the car must meet to be eligible for financing.
For example, most lenders require the car to be in good condition and be less than 8 to 10 years old. Many lenders also have a minimum lending amount. As such, if the car you want to buy is less than the minimum amount, you may need to seek alternative borrowing options such as a personal loan or line of credit.
| Why Do Lenders Have These Restrictions? From the lender’s perspective, if the vehicle you’ve secured the loan against depreciates in value far below the loan amount, the lender will lose money if you were to default on your payments. |
Where Can You Get A Car Loan?
Car loans are available from various sources, including the following:
- Banks: If you have good credit and steady finances, you may qualify for a car loan with a bank. They typically offer the lowest interest rates and are well-regulated and trustworthy. While the application and approval process can take longer, it’s generally the most affordable option. To get a bank car loan, you can usually apply with the bank or request bank financing with a partnered dealership.
- Private Lenders: Private lenders are a good alternative for borrowers with bad credit or limited income. They have flexible requirements compared to banks, and often have a much faster application and approval process. However, these loans may come with higher interest rates and additional fees. You can generally get an instant online quote with a private car loan lender.
- Dealerships: One of the most convenient options for car financing is dealerships, allowing you to buy and finance your car all in one place. Moreover, many dealerships offer in-house financing and loans from partnered third-party lenders, which may include banks and private lenders who accept bad credit borrowers. Some dealers may also offer certain deals and promotions, such as 0% APR financing or no down payment car loans.
Best Car Loan Lenders
Learn more: Best Car Loans In Canada
Are You Eligible For A Car Loan?
Generally speaking, lenders will look at the following factors to evaluate your creditworthiness:
- Income: Lenders typically have a minimum income requirement.
- Job Stability: A car loan term can easily range between 3 to 8 years. Given the length of a car loan term, lenders like to know that you have a reliable job or a consistent source of income to pay for it. As such, many lenders typically require you to be employed for at least 3 months at your current job to qualify for a loan.
- Debt-To-Income (DTI) Ratio: Lenders will look at your DTI ratio to make sure you can afford the loan along with your other debts.
- Down Payment: Another aspect that lenders consider when you apply for a car loan is your down payment. The higher your down payment, the better your chances of getting approved.
| Can You Get A Car Loan With Bad Credit? Yes, while lenders generally prefer borrowers with a ‘good’ credit score (660+), many dealerships and private car loan lenders are willing to work with those with bad credit, given that all other criteria check out. Moreover, it’s important to note that while these lenders may be more lenient, they are generally more expensive. Learn more: Bad Credit Car Loans Canada |
How To Apply For A Car Loan?
The way you apply for a car loan may vary slightly depending on the option you choose.
Step 1: Get Pre-Approved
Before applying with any one lender, you should consider getting quotes so that you can secure the best rate for you.
You can use a loan comparison website like Loans Canada to get multiple quotes from different lenders with a single application. That way, you can review your options and choose the best rate and term for you. This can help you save hundreds, if not thousands, of dollars in interest.
Step 2: Gather Your Documents
Some borrowers end up getting rejected due to missed documents and incomplete applications. To avoid such mishaps, it’s a good idea to gather the following documents to apply for a car loan:
- A valid driver’s license
- Car insurance
- Proof of income
- Photo identification
- Proof of address
- Valid bank account
Step 3: Apply
Once you’ve prepared your documents and selected a loan offer, you can complete the application. Depending on who you apply with, the process of financing the car may be different:
- Banks: You can apply for a car loan before or after choosing a vehicle. Many banks offer pre-approvals, so you can shop with confidence. Alternatively, you can secure bank financing after selecting a car at a dealership.
- Private lenders: With private lenders, you typically apply online and receive a pre-approval. From there, you’ll be directed to shop at a partnered dealership. Once you’ve selected a car, you complete the financing process.
- Dealerships: With dealerships, you usually pick a car first and then go through the dealer’s financing process. They often use their network of partnered lenders to offer financing based on your financial profile. Some may offer in-house financing.
How Much Will Your Car Loan Cost?
The cost of your car loan will vary based on a number of factors, including:
- Interest: The interest rate you pay on your car loan can vary greatly from lender to lender. Generally speaking, interest rates may be lower when you apply with good credit and offer a hefty down payment, making the loan more affordable.
- Term: The length of your loan term will significantly affect the cost of your loan. The shorter your term, the higher your monthly payments, but the more you’ll save on interest. The longer your term is, the more affordable your payments will be, but overall, it is more expensive as you’ll be paying more on interest.
- Fees: Be sure to account for all the fees tacked on to your car loan, like administrative fees, freight charges, tire levy fees and other fees. Be sure to also consider add-on fees such as extended warranties, paint protection and more.
- Sales Tax: When you buy a car, you’ll be subject to 5% – 15% sales tax depending on where you live, and whether you buy a car from a private seller or a dealership. This amount can be paid upfront or rolled over into your car loan.
Speak with a Loans Canada representative today and learn how you can refinance your car loan and save. Call us today at 1-877-995-6269 or click here.
Note: Program is currently not offered in Quebec.
| What Will Your Car Loan Payment Look Like? To give you an idea of what you’ll pay on your car loan, let’s illustrate using an example: – Loan amount: $15,000 – Interest rate: 5% – Loan term: 60 months Using these variables, your monthly car loan payments would be $283.07, and your total interest paid would be $1,984.11. You can quickly and easily figure out your car loan cost by using an online car loan calculator. |
Things To Remember When Getting A Car Loan
Before taking out a car loan, consider the following:
Check Your Credit Score
It’s important to check your credit score before applying for auto financing to see if you meet the minimum requirements of your lender. If you find that your score is lagging, perhaps take some time to give it a boost before applying. Otherwise, you may need to consider applying with an alternative lender.
Note: To check your score for free, use Loans Canada’s CompareHub tool.
Watch Out For Negative Equity
You have equity when your car loan balance is less than the value of your car. But there’s a risk of having negative equity, which means you owe more money on your car loan than what your car is worth.
To avoid this possibility, consider making a big down payment and opting for a shorter repayment term.
Check Your Car History
If you’re buying a used car, make sure you request the vehicle’s history report, which will give you important information about prior ownership, accidents, repairs, and maintenance.
Look Into Car Rebates
While the federal government no longer offers rebates for EVs and hybrids, many provinces still do. Look into your province’s EV rebate program to help keep costs low when buying an electric or hybrid vehicle.
What If You Can’t Get A Car Loan?
There are a number of reasons your application may have been rejected. Here are some of the most common reasons you may not have been approved.
- Your debt-to-income ratio is high. Many lenders will see this as a warning sign that you won’t be able to pay for a car loan with all the debt you currently have.
- Your income is unreliable. If you don’t have a steady source of income, many lenders will be wary of approving you.
- You’ve requested a loan that is too high. If the car loan amount is too high relative to your financial health, lenders will be less inclined to approve you, or may approve you for a lower amount.
- There is a mistake on the application. Any wrong or incomplete information on the form, as well as missing documents, will put a halt to your approval.
- You have bad credit. Your credit history is one of the most common factors banks, credit unions will use to determine your creditworthiness or risk. While private lenders may accept lower credit scores, banks generally do not.
Alternative Options To A Car Loan
While car loans are the standard type of financing used to purchase a vehicle, other financing options may be available:
Personal Loans
You can use a personal loan to buy a car, especially if you’re buying from a private seller. The funds from a personal loan can be used to cover the full cost of the vehicle, which can be especially useful if you’re buying used.
Unlike car loans, personal loans are typically unsecured, meaning your car isn’t used as collateral. However, this often means higher interest rates.
Leasing
Leasing a car gives you the flexibility to use a new vehicle for a specific period without the long-term commitment of ownership and the ability to get a new car every few years. Otherwise, you may have the option to buy the car at the end of the lease. Monthly payments are typically lower than financing, making it a potentially more affordable option.
However, there are more restrictions on the vehicle with a lease compared to traditional financing. For instance, there may be mileage limits, and you don’t technically own the vehicle during the lease term.
Learn more: Leasing A Car In Canada
Lease Buyout
When you lease a car, typically a new one, you have the option of returning the car or buying the car at the end of the contract term. Buying the car at the end of the lease term is what you would call a lease buyout.
When you lease, you enter a contract whereby you make regular payments over the agreed-upon period. At the end of the lease, you can buy the car with a loan from a bank or third-party lender, assuming you can’t afford the car in one lump sum payment. Whether you should buy it depends on the residual value of the car and how much you’re willing to pay for it.
Paying In Cash
If you have the funds readily available, you can pay cash for a car to cover the full purchase price. This may be an appealing option when dealing with private sellers, since it avoids the need to take out a loan and pay interest.
Dealerships also accept cash payments, though they may ask for certain documentation to ensure the funds are legitimate and not counterfeit or part of a money laundering scheme.
Learn more: Is Paying Cash For A Car A Good Idea?
Final Thoughts
Buying a car is a big decision, and understanding your loan options can make a big difference in affordability and payment management. Whether you choose to pay in cash, finance the purchase, or enter into a lease agreement, understanding the loan term, interest rates, and all other fees is essential. As long as you’re prepared and understand the ins and outs of financing, you can get yourself a vehicle that suits your lifestyle and your wallet.
