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Are All Car Loans Open in Canada?

Are All Car Loans Open in Canada?

In Canada, you have two main options when it comes to auto financing – open and closed car loans. Both have their own unique pros and cons. An open car loan acts more like a revolving line of credit, with flexible monthly payments and no set end date. A closed car loan has a structured repayment schedule with fixed payments until the balance is fully paid off.


When shopping for a car loan, it’s important to understand the key differences between these two types of financing. This will allow you to choose the option that best fits your budget and financial situation. In this guide, we’ll provide a comprehensive overview of open and closed car loans in Canada – from how they work to their advantages and disadvantages.


Whether you need a new or used vehicle, financing can help make it more affordable. By evaluating open vs closed loans, you’ll gain the knowledge to make an informed auto financing decision. Let’s dive in and explore everything you need to know about car loans in Canada.



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What is an Open Car Loan?

An open car loan has no set repayment period and acts more like a revolving line of credit. You make monthly payments but there is no set end date to finish repaying the loan. With an open car loan, the balance owed can fluctuate up or down each month. You can pay more than the minimum due to pay down the principal faster, or pay less during months when money is tight.

The key features of an open car loan include:

 

  • No fixed loan term or set number of payments
  • Ability to increase or decrease monthly payments within limits
  • Interest accrues on the open balance each month
  • Principal owed can go up or down each month
  • No pre-set payoff date

 

This flexibility and revolving nature sets open car loans apart from closed-end installment loans that have structured repayment schedules. With an open car loan, the lender can’t demand full repayment at any time unless you default on the terms.

 

Pros of Open Car Loans

Open car loans come with several advantages that make them appealing financing options for some borrowers:

 

  • More flexibility in monthly payments – With an open car loan, you aren’t locked into a rigid monthly payment schedule. If money is tight some months, you have the flexibility to pay less without being considered delinquent on your loan. This can help you avoid late fees and other penalties when you need to adjust your budget.
  • Ability to pay down principal faster without penalties – Since open car loans don’t have a set payoff date, you can choose to pay more than the minimum due and put extra funds toward the principal whenever you want. This allows you to pay off your auto loan faster and reduce the total interest paid over the life of the loan.
  • Interest savings over time if you consistently pay more than minimum – Making extra principal payments on an open car loan reduces your overall balance faster. The less you owe in principal, the less interest that accrues each month. Paying down an open car loan aggressively can lead to substantial interest savings compared to just making minimum payments.

 

Cons of Open Car Loans

While open car loans provide more flexibility, they do come with some potential drawbacks to be aware of:

 

You may end up paying more interest over the long run – With no set payoff date, it can be tempting to just make minimum payments indefinitely. This causes the overall interest costs to accumulate over time. Having no finish line in sight makes it easier to drag out the loan and overpay on interest charges.

 

The lender can demand full repayment at any point – Since open car loans function like revolving credit, the lender has the ability to close the loan and require complete payoff of the remaining balance whenever they want. This lack of payment security can create stress.

 

Interest rates are typically higher – Open car loans generally have higher interest rates compared to closed-end auto loans. The increased risk of not having structured payments or a set maturity date leads to a higher rate.

 

What is a Closed Car Loan?

A closed car loan has a set repayment schedule with fixed monthly payments over a structured timeline. Unlike an open-ended car loan, closed auto loans have a defined start date and end date for when the loan balance must be fully paid off.

With a closed-end auto loan, the principal balance owed declines over time as you make your regular monthly payments. Each payment goes towards both interest charges and reducing the remaining principal on the loan.

Closed car loans have predictable, fixed monthly installments that stay the same over the full loan term. This allows for easier budgeting since you’ll know exactly what your car payment amount is each month.

Having a set end date also provides motivation to pay off the principal faster. Since closed loans have structured payoff timelines, you can see your progress towards paying off the balance and eventually owning the vehicle free and clear.

 

Pros of Closed Car Loans

Closed car loans have several advantages that make them a good option for many borrowers:

 

Predictable monthly payments – With a closed-end auto loan, you’ll have a set monthly payment amount for the full duration of the loan. This makes budgeting much easier, since you’ll know exactly what to expect each month.

 

Pay less interest over the loan term – Closed loans charge interest over a predefined period, rather than leaving the balance open-ended. This motivates borrowers to pay off the balance quicker to save on interest fees.

 

Motivation to pay off principal faster – Having a set end date gives borrowers an incentive to make extra payments when possible. Doing so reduces the total interest paid and shortens the loan duration.

 

If you value predictability and saving money on interest, a closed car loan may be the better fit for your auto financing needs.

 

Cons of Closed Car Loans

While closed car loans offer predictability, they do have some drawbacks to consider:

 

Less flexibility – With a closed loan, you are locked into fixed monthly payments for the duration of the loan term. This can be problematic if you hit a rough financial patch and struggle to make the payments. Unlike an open loan, you cannot adjust the payment amounts month-to-month based on your situation. Once you agree to the set repayment schedule, you are obligated to stick to it.

 

Prepayment penalties – Many closed car loans impose prepayment penalties if you pay off the balance early. This involves paying extra fees and interest charges if you make additional payments to pay down the principal faster than the original amortization schedule. Closed loans want to ensure the full interest is earned over the entire loan term, so will penalize borrowers who try to outpace that schedule.

 

Getting the Best Car Loan

When shopping for a car loan, it’s important to take steps to secure the most favorable financing terms possible. Here are some tips to get the best car loan:

 

Check Your Credit Score

Before applying for an auto loan, check your credit report from all three major credit bureaus. Look for any errors or discrepancies that could negatively impact your score. A higher credit score typically means qualifying for lower interest rates from lenders.

 

Compare Lenders

Don’t just accept the first loan you’re offered. Shop around and compare rates and terms from banks, credit unions, and online lenders. Getting multiple car loan quotes can save you thousands over the life of the loan.

 

Opt for Shorter Loan Terms

You’ll pay less interest over time if you choose a 36 or 48 month loan term instead of 60 or 72 months. If the payments fit your budget, a shorter term is financially smarter.

 

Make Extra Payments

Most lenders allow you to pay more than the minimum due each month without penalty. Making extra principal payments reduces the overall interest paid and shortens the time until your auto loan is paid off.

 

The Bottom Line

When deciding between open and closed car loans, it’s important to consider the long-term costs. While open loans offer more flexibility, closed loans tend to be more affordable over the full repayment period.

With a closed-end auto loan, you’ll have a set monthly payment and a fixed end date. This allows you to easily budget the payments into your finances. It also motivates you to pay off the balance quicker since you know exactly when it will be fully paid. Closed loans generally have lower interest rates as well.

Over the life of the loan, you’ll pay less in interest charges with a closed-end loan. Opting for a shorter term also reduces the total interest paid. This makes closed loans the more cost-effective option for most borrowers looking to save money.

Before applying for financing, take time to realistically assess your budget and financial situation. This will help you determine if you need the flexibility of an open loan or can handle the structured payments of a closed loan. The right loan type depends on your individual circumstances.

By understanding the key differences in open vs. closed car loans, you can make an informed decision to get the most affordable auto financing. Be sure to shop around for the best rates and terms that fit your needs.

 

Shopping for Car Loans

When shopping for a car loan, it’s important to compare rates and terms from multiple lenders to get the best deal. Here are some tips:

 

– Get pre-approved before visiting dealerships. Having a pre-approval letter in hand shows you’re a serious buyer and gives you leverage to negotiate.

– Compare rates from banks, credit unions, and online lenders. Run the numbers to see both the monthly payment and total interest charges for different loan offers.

– Look beyond just the interest rate. Consider the loan term length, fees, prepayment penalties, and other fine print too.

– See what promotional financing deals may be available, like 0% interest for certain terms.

– Opt for the shortest loan term you can afford to pay less interest over time.

– Make sure to get quotes for both new and used vehicle loans.

– Calculate the total loan cost by adding the purchase price, interest, taxes, and fees.

– Ask the lender to explain all the charges and terms in detail so there are no surprises later.

– Negotiate to improve the interest rate, reduce fees, or secure other perks like extended warranties.

– Read the fine print! Get all agreements reviewed before signing anything.

 

Shopping around for the best rates and aggressively negotiating can help save thousands over the life of your car loan. The lender competition for your business can work to your advantage.

 

Applying for Car Loans

When applying for a car loan in Canada, there are some key documents and information you’ll need to provide to lenders:

 

  • Proof of income – Recent pay stubs, tax returns, bank statements showing direct deposits, or proof of government benefits
  • Proof of identity – Driver’s license, passport, or other government-issued ID
  • Down payment amount – If you’re not financing 100% of the vehicle cost
  • Information on the vehicle – Make, model, year, mileage, VIN, and purchase price
  • Information on auto insurance – Proof you have valid insurance or will obtain it

 

The lender will run a credit check as part of reviewing your application. They’ll request your permission first and check your credit report through either TransUnion or Equifax. This allows them to evaluate your credit score, payment history, debts, and other factors to determine your creditworthiness.

In general, a credit score of 720 or higher gives you the best chance of approval and lowest interest rates. Scores below 620 will make getting approved more challenging. The lender will determine the maximum loan amount and interest rate you qualify for based on your creditworthiness.

Having a co-signer with good credit may help if your score is low. Provide the co-signer’s information and documents when applying. The lender will run a credit check on them too. A cosigner promises to repay the loan if you can’t.

 

Interest Rates

Interest rates are a major factor in determining your monthly car loan payments. Lenders consider several elements when setting rates for auto financing:

 

  • Your credit score – Borrowers with higher scores generally qualify for lower rates
  • Down payment amount – Larger down payments can lead to reduced rates
  • Loan term – Shorter loan terms often have lower rates
  • Type of vehicle – New cars typically have lower rates thanused ones
  • Market interest rates – Rates fluctuate based on the economy and lender policies

 

You’ll also need to decide between a fixed or variable interest rate when taking out a car loan. With a fixed rate, your interest rate stays the same over the full loan term. This allows you to lock in affordable monthly payments. Variable rate loans have interest rates that fluctuate based on market conditions. While they may start lower, variable rates come with the risk of payments rising over time.

Carefully weigh the pros and cons of both fixed and variable rates for your situation. Locking into a fixed rate gives you predictable payments but less flexibility. Meanwhile, variable rates offer lower initial costs but unpredictable payments. Shop around for the best rates and terms from multiple lenders.

 

Repayment Terms

When applying for a car loan, two key factors that impact the total interest paid and affordability of payments are the length of the loan term and the monthly payment amount.

Most auto loans have terms ranging from 24 to 84 months, or 2 to 7 years. Longer terms of 6-7 years mean lower monthly payments, but you pay more interest over the life of the loan. Shorter 2-3 year loans have higher monthly payments but you pay off the principal faster and less interest. Evaluate your budget to find the optimal term length.

Monthly payments on a car loan factor in the loan amount, interest rate, and length of term. Paying more per month reduces interest paid and pays the loan off faster. Paying extra towards the principal is advisable if you can afford it. Just beware of prepayment penalties with some lenders.

Carefully consider both the loan term and monthly payment when applying for financing. Opting for too long of a term or too high of a payment relative to income can make a car loan unaffordable.

 

Conclusion

Choosing between an open or closed car loan depends on your unique financial situation and goals. This guide has covered the key differences, pros and cons, and tips for getting the best rates and terms.

The main takeaways are:

 

  • Open loans offer flexibility but can cost more in interest over time
  • Closed loans have predictable payments but less flexibility
  • Check your credit and compare multiple lender rates
  • Opt for shorter terms to pay less interest
  • Make extra payments when possible to pay down principal

 

It’s important to shop around and negotiate the best deal, as rates and terms can vary widely among lenders. Whether open or closed, the right auto financing can help make your next car purchase more affordable. Carefully evaluating all your options will lead to a loan that best fits your budget and financial goals.

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Questions About Open Car Loans

The majority of car loans in Canada are open loans, also known as demand loans. This means that there is no set repayment schedule or end date to the loan. The lender can demand full repayment of the loan at any time. However, most borrowers make regular monthly payments until the loan is fully paid off.

 

The average interest rate on a new car loan in Canada is around 4-7%, while used car loans tend to have interest rates of 6-9%. The exact rate that an individual qualifies for will depend on factors like their credit score, the loan amount, loan term, and the lender. Those with excellent credit scores can qualify for rates as low as 0%.



Most lenders in Canada require a minimum credit score of around 600 to qualify for an auto loan. Scores between 650 and 680 are considered good credit, and will qualify you for better interest rates. Scores above 700 are considered excellent and will get you the best rates.

Yes, there are lenders that specialize in offering car loans to self-employed borrowers and those with bad credit or no credit history. The interest rates may be higher, but you can still get approved. Make sure to shop around and compare options from major banks, smaller financial institutions, and specialized subprime lenders.

Most lenders in Canada will approve auto loans up to $60,000 for new vehicles and $40,000 for used vehicles. High income borrowers with excellent credit scores may qualify for loans up to $100,000. The amount you qualify for will depend on factors like your income, existing debt, credit history and down payment.

Typical documents needed to apply for a car loan in Canada include: proof of income (pay stubs or tax returns), proof of address, proof of auto insurance, driver’s license, list of assets/liabilities, down payment amount, copy of purchase agreement, and specification sheet of the vehicle you wish to purchase.

Most lenders in Canada offer auto loan terms between 24 and 84 months. 24-36 months are common for used cars, while 48-84 months are more common for new cars. The longer the term, the lower your monthly payments will be, but the more interest you pay overall.



Yes, getting pre-approved for a car loan in Canada is recommended. It allows you to know your budget, interest rate and terms before entering negotiations with the dealer. Banks and credit unions commonly offer pre-approvals. It also strengthens your bargaining position.

The best rates on car loans are generally offered directly by major banks and credit unions rather than dealership financing. Compare rates from TD Canada Trust, RBC Royal Bank, Scotiabank, CIBC, BMO Bank of Montreal, Tangerine, and local credit unions. Brokerages like Ratehub.ca also help you compare.

Fixed rate car loans are the most common in Canada. The interest rate stays the same over the full loan term, making your monthly payment predictable. Variable rate loans may start lower, but the rate fluctuates making payments less predictable. Most experts recommend fixed rate loans for stability.

Getting approved for a car loan with no job or credit history is challenging but possible in some cases. Options include having a co-signer with good credit guarantee the loan, putting down a large down payment, or getting a secured loan using collateral. Specialized subprime lenders may approve such cases at higher rates.



Most car loans in Canada do not allow you trade in or upgrade early, usually for at least 12 months. Even after that period, you will likely need to have significant positive equity in the vehicle to qualify for a new loan. Many lenders forbid upgrades until the original loan has been fully paid off.



Unlike mortgages, most auto loans in Canada can be paid off early with no penalties. This allows you to pay more than your monthly payment or make lump sum payments to pay off your loan faster and save on interest charges. Double check if your loan has a prepayment penalty before doing this.

Yes, if you fall too far behind on payments on your auto loan in Canada, the lender can hire a repossession company to take back your car. After repossession, you will still owe any loan balance left even though you no longer have the vehicle. This will also severely hurt your credit score.

If you can no longer afford your monthly car loan payments in Canada, you may be able to refinance the loan, add a co-signer, voluntarily surrender the vehicle, or file a consumer proposal to negotiate lower payments. As a last resort, declaring bankruptcy will eliminate the debt obligation.

If you use the vehicle for business or employment purposes, the CRA allows you to deduct part of your auto loan interest expenses on your Canadian personal income tax return. Keep detailed records of business vs personal usage. Interest costs cannot be deducted if it is used solely for personal driving.

When shopping for the best rates on a car loan in Canada, having multiple credit checks run on your report over a short period will typically only count as a single inquiry. This protects your score from taking multiple hits. So don’t hesitate to compare several lenders.



Tips to improve your chances of getting approved for a car loan at the best possible rate in Canada include maintaining excellent credit, keeping other debts low, putting at least 20% down, shortening the loan term, having stable employment income, and being a long term customer of the lending institution.

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