Getting an auto loan
An auto loan lets you spread the cost of a vehicle over time instead of paying the full price up front. Whether you’re buying a brand-new model, a reliable used car, or refinancing an existing loan to get a better rate, the structure is similar: the vehicle itself secures the loan, you make fixed payments, and once the balance is paid off you own the car free and clear.
How an Auto Loan Works
Most lenders cover 80 – 100 % of the purchase price (including taxes and fees) for terms ranging from 24 to 84 months. You provide basic identification, proof of steady income, and details about the car—make, model, year, mileage, and vehicle identification number (VIN). After approval the lender pays the dealership or previous lender directly; you drive away and begin monthly repayments.
Because the vehicle is collateral, rates are usually lower than on unsecured personal loans, but you must keep comprehensive insurance in place. Failing to make payments can lead to late fees, credit-score damage, and ultimately repossession.
Purchase vs. Refinance
Purchase Financing. Getting pre-approved before shopping protects you from high-pressure “in-house” offers and lets you negotiate the vehicle price separately from the financing. A pre-approval letter shows the maximum you can borrow and the rate you qualify for, so you can walk away if the deal doesn’t meet your budget.
Refinancing. If rates have fallen or your credit has improved since you signed the original loan, a refinance can reduce the monthly payment, shorten the term, or both. The new lender pays off the old loan, takes over the lien, and issues you a refreshed payment schedule—often saving hundreds or even thousands over the remaining life of the loan.
When an Auto Loan Makes Sense
- You need reliable transportation now but don’t want to drain cash savings.
- Your current vehicle loan carries a high interest rate and you qualify for a lower one today.
- You’d like to bundle sales tax, extended-warranty costs, and licensing fees into one predictable payment.
- Your credit history is thin and you want a secured installment account to help build your score.
Eligibility & Documentation
Lenders look at your debt-to-income ratio, credit score, employment stability, and—if refinancing—the car’s age and mileage. Typical documents include:
- Government-issued photo ID
- Two recent pay stubs or three months of bank statements
- Proof of insurance (or intent to insure)
- Bill of sale or current loan payoff statement
Self-employed borrowers can use recent tax returns or accountant-prepared financials instead of pay stubs.
Costs Beyond the Interest Rate
In addition to interest, budget for provincial sales tax, registration fees, dealer documentation fees, and optional add-ons like extended warranties or protection packages. Ask for the “all-in” price in writing before signing—small extras can add thousands over the term when rolled into the loan.
Tips to Save Money
- Make a down payment of at least 10 % if possible—every dollar up front cuts interest over the life of the loan.
- Choose the shortest term you can comfortably afford; longer terms have smaller payments but cost more overall.
- Keep your credit-card balances below 30 % of the limit for at least two months before applying.
- Consider bi-weekly payments; making half-payments every two weeks shaves a full month off each year.
Frequently Asked Questions
How long does approval take?
Many lenders issue a decision within hours; funding and dealership payment usually follow within one business day.
What credit score do I need?
Scores of 660 + generally qualify for the best rates, but many lenders approve borrowers in the mid-500s with higher rates or larger down payments.
Can I pay off the loan early?
Most Canadian auto loans have no prepayment penalties, so extra payments go straight to the principal and reduce total interest.
Is GAP insurance worth it?
If your down payment is small or the term exceeds five years, GAP coverage can protect you from owing more than the car is worth if it’s written off early in the term.
Can I refinance if my vehicle is older than seven years?
Some lenders cap refinancing at 7-10 model years or 160,000 km. If your car exceeds those limits, a credit union or specialty lender may still help, but rates and terms vary.