A guide to getting a car loan in Canada
How to apply for a car loan
1. Check your credit score first
When it comes to getting vehicle finance, your credit score matters. Your credit score determines whether you’re likely to get a loan and the interest rate that you will pay. If you identify that your credit score is low, you can consider improving it before applying for a car loan. The reduced interest rate could save you thousands of dollars over the life of the loan. Learn more about how you can get a free credit report.
2. Figure out your budget
There’s more to car ownership than just the car. You also have to take into account costs such as:
- Petrol ($100 – $200 per month)
- Insurance ($100 – $160 per month)
- Car maintenance ($100+ per month)
- Parking fees ($50+ per year)
- Vehicle registration ($180+ per year)
That works out to be $3,830 to $5,750 per annum ($319 to $479 per month) before car loan repayments are added on.
What will your car loan repayments be? For every $10,000, your repayments can range between $193 and $277+ per month on a five year or 60 months term. A good credit score will save you $2,000 to $4,000 over the life of your loan, for every $10,000 borrowed.
In summary, if you have vehicle finance – $500 to $700 per month is the minimum monthly budget required to own and operate a car in Canada.
3. Compare lenders
You have three vehicle finance options:
- Your bank or credit union
- Online lenders
- Dealer finance
On Best Loans Canada, we compare banks, credit unions and online lenders. See the table at the top of this page to compare lenders. Use our Car Loan Calculator to see what your estimated monthly repayments could be, along with the features.
4. Apply for a loan or get preapproval
During your loan application, you will need to have the following things ready:
- Home address, phone number and email address.
- Proof of residence. A recent utility bill such as your telephone or electricity bill.
- Proof of identity. A Government-issued ID such as your driver’s licence or Canadian passport.
- Social Insurance Number (SIN) and date of birth (DOB).
- Bank statements (up to 3 months).
- Bank account details for where you want your loan to be deposited. However, some lenders may pay the car dealer directly.
- Employer details. The name of your employer, time employed, address and phone number.
- A list of your expenses.
- Proof of expenses and expenditure, such as your mortgage statements, electricity bill, etc. However, most of this will be visible in your bank statement.
Getting your preapproval can take about a day or two and will be valid for 30 to 60 days.
5. Go car shopping
Once you have found the car you’ve been looking for, you can submit your final car loan application. If approved, you will receive the funds in your bank account within 1 or 2 business days, sometimes on the same day. Some lenders will pay for the car directly into the car dealer’s accounts.
Car Loans FAQs
What credit score is required for a car loan?
Ideally, you should have a credit score of at least 660. Anything lower than this significantly decreases your chances of getting the loan. A higher score will reduce the interest rate you pay and will save you thousands of dollars over the life of the loan.
How does interest work on a car loan?
Interest is what lenders charge for lending money. The interest rate you will be charged is determined by your credit score (At times referred to as your FICO score). Your credit score indicates to the lender, the level of risk you pose. If you have a high score, you will receive a lower interest rate. To be approved for a loan, you will want to have a minimum score of around 660, which could mean an interest rate of around 15%.
Can I refinance a car loan?
Yes. There are three main reasons to refinance your car:
1) To reduce your monthly repayments by securing a lower interest rate
2) To reduce your monthly repayments by increasing the term or length of your loan
2) To pay the balloon or residual on the car
Refinancing involves getting a loan to pay off your existing loan. If you have significantly improved your credit score, then you can apply with a new lender or renegotiate with your existing lender.
If you wish to refinance, check to see if there are penalties for paying off your loan early which may negate potential savings. Additionally, keep in mind that if you choose to increase the term of your loan, that you will pay additional interest.
Can you pay off a car loan early?
Yes. Some lenders may charge a fee for ending the loan early, however, this fee is usually not as much as the interest you would pay over the life of the loan.
Are there certain types of vehicles that lenders won’t finance?
Yes. Some lenders have strict guidelines on the types of vehicles they will lend for. The restrictions relate to the type of vehicle, its use, age and the mileage on the car.
What are some examples of vehicles that lender won’t finance?
Lenders may not provide finance in the following instances:
Vehicle types: RV or recreational vehicles, commercial vehicle, motorbikes.
Usage: Racing, commercial use.
Age: Vintage cars or a hard limit based on years, i.e. vehicles that are 2, 5, 7 or 12 years of age or older.
Speak to your preferred lenders to learn more about their restrictions. There are also lenders that specialise in financing vehicles for special uses or older vehicles (i.e. commercial lenders, RV or motorbike lenders, etc).
In some instances, it may better to choose a general purpose personal loan.
Carla is a skilled copywriter at BestFind with a background in marketing and communications. She specializes in reviewing personal loan and finance products to help readers navigate the complex world of personal finance.
