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Auto Financing in Canada

Buying a car can be 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 confusing. Knowing your financing options can really help smooth the process and save you money along the way.

Car Loans

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. You can get the funding you need through a bank, an alternative lender, or through the dealership itself. Most lenders will allow you to borrow from 80% to 100% of the value of the car.

New Car Loan: How Does It Work?

Repaying a car loan from a bank, alternative lender or a dealership involves paying them 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.

Used Car Loans: How Does It Work?

A used car loan works exactly like a new car loan except it has some limitations. Used car loans typically have limits set against it as lenders don’t want to loan an amount that is more than the car’s value. Why? Because 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. As such, the interest rate for used cars can be higher than a loan for a new car.

How Long is a Car Loan Term?

Whether you’re financing a new or used car, loan terms typically vary between two to eight years.

Auto Refinancing

Auto refinancing involves replacing your current car loan with a new loan that has different rates and terms. You can choose to refinance your car loan by renegotiating the terms with your current lender or you can choose to switch lenders completely. Regardless of which way you choose to go, consumers typically refinance car loans for two reasons; to extend their term or to qualify for a lower interest rate.

How Does It Work?

When you decide to refinance your car, you basically take out a new loan to pay off the old car loan. The new car loan will then have to be repaid in installments with interest.

How Long is an Auto Refinancing Term?

Generally, the auto refinancing term can be between 2 and 7 years.

Rent-to-Own

The rent-to-own option is great for people with bad credit who are unable to get approved for a lease through traditional means. There’s no credit check, you just need a personal ID, proof of residence, and an income source. The rent-to-own option involves “leasing” a used car for a period of time. After this, you can choose to return or buy the car.

How Does It Work?

The rent-to-own option works a lot like a car lease where you make periodic installment payments over an agreed-upon time and then at the end of the term you have the option to return the car or buy the car. If you decide to buy, payments that were made for “leasing” can be used to cover a portion of the car. However, if you don’t have sufficient funds to purchase the car, you can opt to return the car instead. Payments are made directly to the dealership or car rental company rather than a bank or third party lender.

How Long is a Rent-to-Own Term?

Are not as long as leases, typically last 1-2 years.

In-House Financing

Dealers typically offer in-house financing for cars that are older and have high mileage. These features make it an optimal option for people with bad credit. Instead of financing your car through a bank or a third party lender, in-house financing streamlines the process by giving you the option to choose your car and pay for your car from the same place.

How Does It Work?

In-house financing works just like a regular car loan. You simply choose a car you like, the dealer will then finance the car for you after which you will repay them in equal installments with interest over a predetermined period.

How Long is an In-House Financing Term?

Terms usually last up to five years.

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.

How Does It Work?

When you lease you enter a contract where 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 cannot 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 are willing to pay for it.

How Long is a Lease Term?

A leasing term usually lasts between 3-5 years.

Costs Associated With Auto Financing

Interest: The interest you pay on your car can vary greatly from lender to lender. Take account of the interest you will pay along with the principal.
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, application fees, penalty fees, etc.

Advantages of Auto Financing

High approval rates. Car loans are secured against the car you purchase, so lenders are more lenient on their lending requirements.
You own the car. After you’ve paid off your loan, you’ll have complete ownership of the car and no more monthly payments.
You can build equity in your car. You have equity when your car loan balance is less than the value of your car. You can gain equity in your car by making a big down payment and by having a short-payment term.

What Makes a Good Car Loan Applicant?

While banks will use your credit score as the main driver to come to a decision, other alternative lenders look at factors beyond that like:

Income
Job stability
How much debt you have
Down payment

What Documents Do I Need to Apply For Auto Financing?

In most cases, when you apply for a car loan you will need the following documents.

A valid driver’s license
Car insurance
Proof of income
Photo identification
Proof of address
Valid bank account

Why Was My Car Loan Application Rejected?

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.
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, and alternative lenders will use to determine your creditworthiness or risk.

Frequently Asked Questions

Do I have to provide a down payment to get an auto loan?

In most cases, you will be required to place at least a 10% down payment. However, there are lenders who may accept less depending on their requirements. It is advised that you make as big of a down payment as you can afford, as it will reduce your monthly payments and will make you look like a less risky applicant.

How do I get pre-approved for an auto loan?

Getting pre-approved is a fairly easy process and one that can help you snag the best deals. To get pre-approved, you will provide the lender with a basic summary of yourself, which typically includes your name, salary, debt, and social insurance number. They will also require a “hard” credit check which will affect your credit. As such, be sure to get a pre-approval from all the lenders you want within 14 days as multiple credit checks within a two week period is seen as one credit inquiry.

Can I get an auto loan with bad credit?

Yes, there are many lenders who cater to the sub-prime market by offering bad credit car loans. Car loans are also one of the easiest loans a person with bad credit can get since they are secured by the car you are purchasing.

Are 72+ month auto loans bad?

Car loans that have terms longer than 72 months should be reconsidered for a number of reasons.

You spend way more on interest
Interest rates are higher when you go for loan terms over 60 months
Less equity. You build equity when your car is worth more than your loan. With stretched out payments, you end up with negative equity.
You can end up paying more than the actual value of the car

How can I get 0% financing?

0% financing is typically offered by auto dealerships looking to meet sale quotas or get rid of old or used cars. In order to qualify for 0% financing, you’ll need to have an excellent credit score. If you do qualify, be sure to check if the 0% is applicable to the entire duration of the term.

Auto Glossary

Terms


Add-Ons	Any features or services that are applied on top of the base price of a car are considered add-ons. These can include things such as tinted windows, heated seats, leather seats, alarms, and wheel locks, to name a few.
Base Price	The base price of a car is the cost of the vehicle without any upgrades or added features that can be added after the car is ordered from a dealership. Only standard equipment and the manufacturer’s warranty are included in the base price, but any other fees will be added afterward.
Certified Pre-Owned (CPO)	CPO cars refer to used cars that have been certified, either by the dealership selling the car or the manufacturer of the vehicle. This gives consumers confidence knowing they are buying a used vehicle that is in good condition. When a used car is obtained by a dealership, it is inspected by a certified mechanic. The car is then repaired if it meets the required standards and is then ready to be sold as a CPO vehicle.
Clear Title	A clear title means that the owner of the car has a free and clear title and no longer carries a balance owing on a car loan. There are no liens of the title or levies from creditors.
Dealership	Auto dealerships are businesses that are authorized to sell new or used automobiles to consumers and serve as a direct dealer for automakers
Dealership Financing	Consumers can obtain dealer financing to help fund the purchase of a vehicle. A contract is signed with a dealership that requires a consumer to pay for a specific amount plus interest and funding fees over a certain period of time. Dealers will send the details of the consumer’s financials to various lenders to find one that will approve the loan.
Depreciation	Depreciation refers to the decline in the value of a vehicle. Immediately after purchase, a vehicle will become less valuable as soon as it is used. Put another way, depreciation is the rate at which an automobile loses its value over time


Extended Warranty	Vehicles come with a manufacturer’s warranty when purchased, but buyers can choose to purchase an extended warranty. This serves as a form of insurance policy on the vehicle to cover the cost of potential repairs in the future. An extended warranty is usually good for a certain period of time and/or mileage.


Lease	A contract that allows an individual the right to use or occupy a property for a specified period of time in exchange for a monthly payment. Leases are common for a property like apartments and vehicles. The individual on the lease does not own the asset at the end of the lease’s term, it is strictly for rental purposes.


MSRP (Manufacturer’s Suggested Retail Price)	Car manufacturers will offer recommendations on how much a car should be priced at the retail level, known as the manufacturer’s suggested retail price, or MSRP. The purpose of the MSRP is to standardize pricing in the automobile industry so that there is not a lot of fluctuation in price from one dealership to another.


Title Loan	A title loan uses the vehicle title as a form of collateral to secure a loan. Borrowers must own their vehicles free and clear and no longer owe any amount on a car loan. A lender will place a lien on the car title in exchange for funds. If the borrower defaults on the loan, the lender can take possession of the vehicle and sell it to cover any losses.
Trade-in Allowance	A trade-in allowance is the amount that a car dealer will reduce the cost of a new car purchase by after the consumer’s old vehicle has been traded in. It is somewhat like being given credit from the sale of an existing vehicle that is then applied to the purchase of a new vehicle.
Trade-in Value	A trade-in value is the amount that dealerships offer consumers for their vehicle and is typically applied toward the purchase price of another vehicle. Dealerships will assess the value of the vehicle and will base the amount that can be applied to a new car purchase. The consumer will then trade in the old vehicle and the assessed value amount will be deducted from the price of another vehicle. Trade-in value is often different than what the vehicle may be worth when sold in the open market.


Vehicle Identification Number (VIN)	Every vehicle will have its own unique vehicle identification number, which is used to identify a specific vehicle. No two vehicles will have the same VIN, making them easily identifiable with this unique 17-character code.