A car loan is a fixed-term, fixed-payment installment loan secured by the vehicle’s title. Because the car itself acts as collateral, rates are typically lower than credit-card or unsecured-loan rates, but higher than a mortgage or home-equity product. Most Canadian lenders finance new and used vehicles from franchised dealers, independent lots, or private sellers, with terms ranging from 24 to 84 months. You can also refinance an existing loan to lower the monthly payment, shorten the term, or both.
The lender registers a lien against the vehicle until you’ve paid the balance in full; miss too many payments and the lender can repossess the car. For that reason, comprehensive and collision insurance are mandatory for the life of the loan. Once the balance hits zero, the lien is removed and you hold clear title.
How Car Loans Work
You submit a credit application—online, at the dealership, or through a direct-to-consumer lender—providing personal details, income proof, and the vehicle’s information (year, make, model, mileage, VIN, and purchase price). The lender reviews your credit report, verifies income, and determines a maximum loan amount based on the lower of the vehicle’s market value or the agreed purchase price. If approved, you receive a contract that spells out:
- Principal amount financed (price minus down payment, plus taxes and fees)
- Annual percentage rate (APR) & term length
- Total cost of borrowing and exact monthly payment
- Payment schedule and due date
After signing, the lender wires the funds to the seller or pays off your existing lender (for a refinance). You take possession of the vehicle and begin making monthly payments until the balance reaches zero.
New vs. Used Vehicles
New-car loans usually qualify for manufacturer sub-vented rates—sometimes 0 % to 3 % APR—because the automaker subsidizes financing to move inventory. The downside is minimal price negotiation room and limited term flexibility.
Used-car loans carry slightly higher rates because resale values are harder to predict, but a lower purchase price can keep the overall loan smaller. Independent lenders also allow private-seller purchases (peer-to-peer sales), provided the vehicle passes a mechanical inspection and the seller holds clear title.
Purchase vs. Refinance
A purchase loan finances a new-to-you vehicle. Pre-approval lets you shop like a cash buyer, negotiate price first, and then finalize paperwork with your preferred lender instead of relying on in-house dealer financing.
Refinancing replaces an existing car loan with a new one. It makes sense if interest rates have dropped, your credit score has improved, or you want to extend or shorten the term. The new lender pays off the original loan, registers a fresh lien, and you start making payments to the new creditor—often at a lower rate or shorter schedule.
Eligibility & Approval Factors
- Credit Score: Mid-600s or higher unlocks the best rates; subprime lenders go as low as the high-500s but at steeper costs.
- Income & Employment: Stable, provable income (pay stubs, T4s, or bank statements) and, for self-employed borrowers, at least two years of tax returns.
- Debt-to-Income (DTI): Lenders prefer total monthly debt payments under 40 % of gross income.
- Vehicle Value: Loan-to-value (LTV) ratios typically cap at 110 % of wholesale book value for new cars and 100 % for used, including taxes and fees.
- Down Payment: Not always required, but 10 %–20 % lowers the principal and can improve approval odds.
Costs, Rates & Fees
Prime-tier borrowers may see rates from 5 % to 9 % APR on a five-year term, while subprime loans can exceed 18 %. Dealers sometimes add a financing administration fee ($300–$600) or mark up the rate above the lender’s “buy rate” to earn a reserve commission. Always compare the dealer’s offer with a direct-lender pre-approval to spot hidden mark-ups.
Other costs include provincial sales tax, licensing, extended warranty, and, in some provinces, a mandatory lien registration fee. GAP insurance (covers the difference between insurance payout and loan balance if the car is totaled) is optional but recommended for low-down-payment loans.
Application Steps
- Check your credit score and pull recent pay stubs or bank statements.
- Apply to a bank, credit union, or online auto-lender for pre-approval.
- Shop vehicles within your approved price range; negotiate the purchase price.
- Submit the final bill of sale (or existing payoff statement for refinance) plus proof of full-coverage insurance.
- Sign the loan contract; the lender pays the seller or old lender, and you drive away.
Responsible Borrowing Tips
- Keep the loan term as short as your budget allows; long terms (72–84 months) lower payments but increase total interest.
- Put at least 10 % down to avoid immediate negative equity.
- Compare dealer financing with your pre-approval; use the better offer or leverage the difference.
- Schedule automatic payments a day or two after payday to avoid NSF fees.
- If rates drop, revisit refinancing—many lenders refinance with no out-of-pocket costs.
Alternatives to a Car Loan
- Lease (lower monthly payments but mileage limits and no ownership).
- Personal loan (unsecured, useful for very inexpensive used vehicles).
- Line of credit (variable rate; flexibility to pay off early without penalties).
- Cash purchase (avoids interest entirely if you can afford it without draining emergency savings).
Pros & Cons
Pros: Predictable payment, lower rate than unsecured options, potential dealer incentives, ownership at the end of term.
Cons: Depreciation can put you “upside-down,” repossession risk if you fall behind, longer terms increase total interest, full-coverage insurance required.
Frequently Asked Questions
How fast can I get pre-approved?
Many lenders issue a decision within minutes online; official pre-approval documents arrive the same day.
Does a bigger down payment lower my rate?
It can. Lower LTV reduces lender risk, often unlocking a better APR.
Can I pay off my car loan early?
Most Canadian auto loans allow early repayment without penalty, but some promotional 0 % offers have fixed schedules. Read the contract.
Is refinancing worth it?
If you can cut the rate by at least 1-1.5 percentage points, lower the payment, or shorten the term without stretching your budget, refinancing typically saves money.
What credit score do I need?
Scores above 700 receive the best rates; lenders exist for mid-500s, but rates climb sharply. Improving your score before applying can save thousands.