Car Loans Canada: Compare Auto Financing Rates, Apply Online - Smarter Loans

What is an Auto Loan and How Does it Work?

An auto loan is a type of debt instrument that consumers use to purchase motor vehicles. Typically, these loans are structured to be paid back in periodic installments and are secured by the value of the underlying vehicle that they are used to purchase. In other words, the vehicle being bought serves as collateral for the loan that can be seized if the borrower fails to pay the scheduled principal/interest.

In terms of the actual structure of the car loan, it is similar to most other consumer loans offered by lending institutions and consists of the principal and the interest. The principal is correlated with the value of the vehicle being bought and/or the amount of down-payment (upfront payment) required. Depending on the vehicle or the lending institution, a down-payment may not be required at all; however, in the case that it is, the larger the down-payment, the lower the principal amount, which translates to reduced costs for the borrower and lower risk for the lender. One example of this is a car worth $5,000 for which the lender stipulates down-payment to be 10% i.e. $500. Once the borrower pays this $750 up front, the lender provides the remaining $4,500 to finance the purchase of the vehicle.

The interest can be thought of as the cost of borrowing i.e. the compensation that the lender receives for taking the risk of providing debt to consumers. While there is no fixed interest rate on auto loans, the rate is contingent upon the lending institution that underwrites the loan and the creditworthiness of the borrower wherein higher-rated customers receive lower rates of interest, and vice-versa.

Lastly, there is also an installment component to car loans where the loan is gradually repaid in a series of consecutive payments, usually made on a monthly basis. Most auto loans are repaid within the 36 months (3 years) to 60 months (5 years) range. The installment nature also makes these loans amortizing, meaning that each scheduled payment is used to repay both the principal and the interest. This results in the loans getting cheaper over the course of their lifecycle due to the interest rate being applied to a lower principal outstanding at each subsequent payment.

What is the difference of a Car Loan compared to leasing?

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In an auto lease, the lessee gains the privileges of the car for a fixed time period or a pre-defined number of miles driven before the car is returned to the lessor. At no point during the leasing period does the ownership transfer over to the lessee. Some dealerships do, however, have an ownership option at the end of the leasing period for lessees to take advantage of if they so wish. Due to the lack of ownership benefits, all things equal, the payments on auto leases are normally less than payments on auto loans.

 

Car Loans Frequently Asked Questions

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What are the minimum requirements to qualify for a car loan in Canada?

Qualifying for a car loan in Canada requires you, as the borrower, to meet certain eligibility criteria. These criteria vary slightly from lender to lender, but typically include meeting a minimum credit score; for most lenders this threshold is set at 550, but there are options for those with lower credit scores seeking car financing. You will also need to show a valid driver’s license, proof of Canadian residency, and proof of income. Some lenders will also require information regarding your other debts and monthly costs when you apply for an auto loan, while others are less stringent.

What is a good interest rate for a car loan in Canada?

Auto loan interest rates in Canada vary from lender to lender, and according to each borrower’s circumstances. The range is quite large from 0% to 30% – and used vehicles are often charged a higher auto loan rate than new vehicles. Online lenders may have more competitive rates than banks and other traditional financial institutions. The exact car loan interest rate you will be charged depends on your credit score (with higher credit scores qualifying you for lower rates), your monthly income, any down payment on the vehicle, the vehicle specifics, and the term of the loan.

Can I get an auto loan with bad credit in Canada?

Finding a bad credit car loan is easier than you may think. While many auto loan lenders require a minimum credit score of 550, there are still plenty of options for those with a score lower than this. You can take a look at our list of bad credit car loan lenders who cater to people in these circumstances, to compare your options. Most bad credit auto loan lenders will balance the increased risk of these loans by charging higher interest rates. Or, alternatively, you may be able to access a car loan with bad credit and avoid high rates if you save up a sizable down payment for the car.

Can I get car financing with no credit in Canada?

New Canadian residents have no credit history in the country, and so do not qualify for credit in the same way that settled residents do. Buying a car with financing is still possible though, as car loans for new Canadians can rely on factors other than credit. Proof of employment is a great way to indicate to a lender that you are not a risky borrower and that you have the income necessary to pay off the loan. Saving a down payment is also very helpful. And finding a cosigner for the loan, who does have a credit history in Canada, can also help ensure approval.

Is it safe to fill out a car loan application online?

Online car loan applications are quick and convenient, but those seeking to get a car loan online need to know that they are protecting their sensitive personal and financial information. Fortunately, there are a number of federal regulations that dictate how your information can be collected and used, to ensure maximum consumer protection. Most online lenders use sophisticated encryption technology to safeguard security; and reputable lenders will always have a privacy policy readily available. So the vast majority of online car loan applicants are well-protected, but it always pays to ensure you are communicating with a reputable company.

How do I apply for a car loan in Canada?

Applying for a car loan starts with finding a lender that’s right for you. Each car loan provider will have different eligibility requirements, as well as different loan options. Start by understanding your financial position and what you need in a loan, as this will narrow your list of potential lenders. Then, compare your different options, considering the loan terms and rates, to find the most appropriate choice for your needs. Once you know which lender to apply to, you need to gather your paperwork. Each lender has their own documentation requirements, but they usually start with: proof of insurance, proof of income, proof of residency, and driver’s license.

Can I get a loan to buy a used car in Canada?

Used car financing is as easy to access as new car financing, with most car dealerships, financial institutions, and online lenders able to provide auto financing for pre-owned vehicles. One advantage of used car financing is that the borrowed amount is typically less than with a new car purchase, as the value of the car is less. So the payments will be lower overall. However the interest rate you qualify for may be higher than with a new car. This is because the loan term on used cars is usually shorter.

Canada auto financing facts

Canada is home to a busy auto market, and a busy auto loan market. Let’s look at the numbers:

• The average car loan interest rate in Canada is 4.5-6%.
• Bad credit borrowers pay on average 7-20% on their car loans.
• The average car loan term is 69 months for new cars, and 65 months for used cars.
• 55% of new car loans in the country have terms of 84 months or longer.
• The average price of a new car in Canada is $33,000.
• The number of vehicles registered in Canada is 34.3 million.