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Best Way To Finance a Car in Canada

Best Way To Finance a Car in Canada

Having a reliable vehicle is essential for most Canadians. Given our vast geography and often harsh winters, a car provides the freedom to commute to work, visit family and friends, and access services no matter where you live. However, cars can also be one of the biggest purchases drivers make. Not everyone has tens of thousands in cash to pay for a new or used car upfront.

That’s where financing comes in. There are many options for Canadian drivers to obtain auto loans and spread out the cost of a vehicle over months or years. While financing increases the total expense with interest, it makes vehicles more accessible and affordable through manageable monthly payments.

In this comprehensive guide, we’ll explore the pros and cons of the most common ways to finance car purchases in Canada. You’ll learn about loans from banks, dealerships, credit unions, manufacturers, and other lenders. We’ll also provide tips on improving your credit, calculating budget-friendly payments, getting the best rates, and more. With this information, you can evaluate all your options and choose the best auto financing solution for your needs and budget.

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Traditional Bank Loans

One of the most common ways Canadians finance a car purchase is through a traditional bank loan. Major banks like RBC, TD, Scotiabank, BMO, and CIBC all offer auto loans directly to customers. To qualify for one of these bank loans, you’ll generally need a good credit score and stable income that shows you can make the monthly payments.

Bank car loans typically have competitive interest rates compared to other financing options. By having good credit, you can usually secure a rate between 3-7% on a new auto loan. Banks also allow you to go through the pre-approval process before visiting a dealership. This gives you a locked-in rate and lets you shop knowing your budget.

The pre-approval process involves completing a standard application where you provide details on your income, existing debts, the car you want, and down payment amount. If approved, the bank issues a pre-approval letter with your max loan amount, rate, and terms. This puts you in a stronger negotiating position at the dealership.


Dealership Financing

One of the most convenient options for financing a car purchase is to go through the dealership where you are buying the vehicle. Dealership financing allows you to take care of everything in one place, from choosing the car to negotiating the loan terms and signing the paperwork. This one-stop-shop approach saves you time and effort since you don’t have to shop around for a separate auto loan.

Most dealerships work with multiple lenders and financing companies to offer loans directly to customers. The dealer will collect information on your income, expenses, credit history and down payment amount and submit your application to their lender partners to find a loan program that fits your situation.

While convenient, interest rates on dealership financing are often higher than what banks and credit unions may offer. Dealers receive a commission from the lenders for originating the loans, so they will try to steer you into the loans with the highest rates since that maximizes their profit. However, you may be able to negotiate the interest rate along with the vehicle price to get the monthly payment you want.

The benefit of packaging the financing with the vehicle purchase is that everything can be taken care of at once. You can use the monthly payment amount as part of your negotiation tactics on the sale price of the car. And any special incentives or rebates offered by the manufacturer can be applied directly to reduce your financing costs. Just be aware that the dealer will likely start with a higher interest rate offer than you may be able to find elsewhere.


Credit Union Loans

Credit unions can be a great alternative to traditional bank loans when it comes to financing a car purchase. As member-owned financial cooperatives, credit unions exist to serve their members, not make profits. This difference in philosophy can sometimes result in credit unions offering more favorable rates and terms compared to major banks.

Credit union auto loans are quite similar to bank loans in many respects. You can apply for preapproval, get terms based on your credit score, and even complete the financing process online in many cases. However, credit unions may be more willing to work with borrowers who have some credit challenges or who don’t meet all the strict requirements larger banks often impose.

For borrowers with low credit scores or limited credit history, a credit union car loan could provide an approval where a bank would likely decline the application. Credit unions also routinely offer discounted loan rates to their members. While a bank may only reduce rates for those with the best credit, credit unions extend special pricing more broadly.

The main downside of credit union auto financing is that maximum loan terms may be a bit less flexible than banks. Large national banks often provide loan terms up to 8 years for new cars and 10 years for used vehicles. Credit unions more commonly top out at 6 years for new and 8 years for used cars.

However, if you have the choice between a longer term bank loan at 7% and a shorter credit union loan at 4%, the credit union is likely still the more affordable option when looking at the total interest paid over the life of the loan.


Manufacturer Financing

One option to consider when financing a car purchase in Canada is taking advantage of special manufacturer financing deals. Many major automotive brands like Ford, GM, Toyota, Honda, etc. offer promotional rates and incentives when you finance directly through them instead of a bank or other lender.

The key benefit of manufacturer financing is that you can often qualify for lower interest rates or other savings that the car company offers to help move inventory. For example, brands will frequently advertise 0% APR deals on new car purchases for 2-3 years if you finance with them. That makes your monthly payments much more affordable compared to higher rate loans.

Manufacturer financing also gives you access to other incentives like cash rebates, waived down payments, and discounted leasing options on select models. The catch is that you usually need to choose among certain qualifying new vehicles the brand is trying to sell more of in order to take full advantage of the low rate or incentive deals.

Overall, if you have your eye on a specific new car model, it’s worth exploring any current manufacturer financing promotions. The savings could potentially lower your monthly payments by hundreds of dollars compared to a standard car loan if you can swing the qualifying purchase. Just be sure to read all the fine print so you understand any restrictions.


Personal Loans

Personal loans are an alternative financing option that come from online lenders and financial institutions. They can provide fast approval, often faster than going through a traditional bank loan application. However, interest rates on personal loans tend to be higher than rates from banks or credit unions.

The main advantage of personal loans for car financing is that they can get you funds quickly, which is helpful if you find the right vehicle but need financing approved in a hurry. They only require a soft credit check initially, so you can check rates without impacting your credit score.

Personal loans work best for borrowers with fair credit, as they may not qualify for prime rates from banks. Lenders look at credit scores and debt-to-income ratios, but may be more flexible than banks in approving loans. Amounts can range from $1,000 up to $50,000 for car buyers.

While interest rates are higher, personal loans offer a predictable fixed monthly payment schedule which helps when budgeting for a car purchase. You’ll pay the loan back in equal installments over a set repayment term. Compare rates from multiple personal loan providers to find the best option.

If you have less-than-perfect credit or need a car urgently, personal loans can provide a viable financing solution. Just be sure to compare interest rates against other options to ensure it’s cost-effective based on your financial situation.


Lease vs Buy Considerations

When deciding how to pay for a new vehicle, two of the most common options are leasing versus buying. Both have their own unique pros and cons to weigh when considering your budget and long-term car ownership goals.

With a lease, you are essentially renting the vehicle for a set period of time, usually between 2-4 years. You’ll make lower monthly payments compared to financing a purchase, but you won’t actually own the car at the end of the lease. Once the lease term is up, you’ll have to either buy out the vehicle if you want to keep it, or return it to the dealer and get a new lease.

The main benefit of leasing is driving a newer car for less money per month. However, leases also limit the total miles you can drive and charge excess wear and tear fees if the car is damaged. You also won’t build any equity in the vehicle like you would through an auto loan.

Financing a purchase means the car is yours and you can keep driving it as long as you want after paying off the loan. Monthly payments will be higher than a lease, but each payment builds equity that you can later use towards your next vehicle purchase. Buying a car costs more upfront but gives you the freedom to drive as many miles as you want without penalties.

When deciding between lease vs buy, look at your budget to see what monthly costs you can afford. Also consider your long-term goals, like whether you want to own the car after a few years or always drive a newer vehicle. This can help you determine if leasing or financing makes the most financial sense.


Improving Your Credit

One of the most important things you can do before applying for any type of auto financing is to check your credit report and score. This gives you a clear picture of what lenders will see when you apply and where you may need to improve. Ideally, you’ll want a credit score above 700 to qualify for the best interest rates from most lenders.

If your credit score is lower than desired, here are some tips to improve it before applying for a car loan:


  • Pay down balances on credit cards and other revolving debt
  • Avoid applying for new credit in the months leading up to your auto loan application
  • Correct any errors on your credit report by disputing them
  • Become an authorized user on someone else’s credit card to build positive payment history
  • Pay all bills on time each month


It can take several months of diligent credit management to see meaningful improvements in your score. If your credit is poor, it’s recommended to start building your score 6 months to a year before needing auto financing. Monitoring your credit reports frequently lets you track progress and address any issues early on.

With some time and effort, you can raise your credit score to where you’ll have your choice of affordable auto financing options. Shopping around for the best rates is much easier when you have excellent credit behind you.


Getting the Best Rates

When financing a car purchase, it’s important to take the necessary steps to secure the most competitive interest rates possible. This not only saves you money over the lifetime of the loan, but also makes monthly payments more affordable. Here are some tips for getting the best rates on your auto financing:


Compare Offers from Multiple Lenders

Rates can vary significantly between banks, credit unions, dealerships, and online lenders. Spend the time to get pre-approved quotes from several sources before deciding. Having multiple offers allows you to leverage them against each other when negotiating. Online marketplaces like RateHub allow you to easily compare rates from over 20+ lenders with a single application.


Negotiate the APR with Dealers/Banks

Many lenders have some flexibility to lower rates further, especially if you already have an offer from a competitor. Politely ask the finance manager at the dealership if they can beat the rate your bank approved you for. Banks may also drop APRs slightly if you push for a better deal.


Make a Reasonable Down Payment

Putting down 15-20% or more upfront shows lenders you are financially committed to the purchase. It also lowers the amount you have to finance, making deals more attractive for banks. Even a few thousand dollars down can secure a lower interest rate in many cases.


Calculate Affordable Payments

When shopping for a car loan, it’s crucial to calculate affordable monthly payments based on the loan terms. This will help avoid overextending your budget.

First, estimate your total monthly costs beyond just the loan payment. This includes car insurance, gas, maintenance and repairs. Insurance for a financed vehicle is required. Budget at least $100-150 per month for gas depending on driving habits. Maintenance and repairs average $100 per month for newer cars and up to $200 for older models.

Next, factor in the loan payment. Get quotes from lenders on your targeted car price range. Payment amounts will vary based on the loan length, down payment, interest rate and other factors. With a longer loan term like 6-7 years, payments are lower but you pay more interest over time.

Plug all these estimated expenses into a monthly budget. Make sure it aligns with your income and doesn’t cut into money needed for other necessities. If the payment is too high, adjust the car price, loan terms, down payment or consider a less expensive model. Sticking to a comfortable payment avoids the stress and costs of overextending your budget.


New vs Used Considerations

One of the biggest decisions when buying a car is whether to purchase new or used. There are important tradeoffs to weigh between these options.

New cars come with the latest features and technology, and you can often get exactly the model, color and options you want. More importantly, new vehicles come with a full manufacturer’s warranty, typically 3 years or 60,000 km. This protects against expensive repairs during the coverage period. However, a new car will depreciate quickly in the first few years. Expect it to lose 10-30% of its value soon after driving it off the lot.

Used cars make more financial sense for buyers on a tight budget. A model that’s 2-3 years old sells for substantially less than new but still offers modern amenities. Maintenance and repairs will cost more over time since the warranty has expired. And you may need to compromise on color, features or condition when buying used. Test driving and inspections are critical to assess wear and tear.

Carefully compare costs between new and used models. While used cars are cheaper upfront, low financing rates on new vehicles can balance out monthly payments. Review projected reliability ratings to see maintenance costs down the road. And prioritize whether you want the latest tech and peace of mind of a warranty, or a more affordable price on a used vehicle.


Set a Realistic Budget

When buying a car, it’s important to set a realistic budget based on your current financial situation. This involves taking a close look at your income, expenses, and how much you can afford for a down payment. Here are some tips for setting a realistic budget:

Consider your monthly take-home income and regular expenses. Account for costs like rent, utilities, groceries, and other bills. This will give you an idea of how much room you have in your current budget for a car payment.

Get preapproved for a car loan. This involves applying with banks, credit unions, or dealerships and getting estimates for how much you’re qualified to borrow. Preapproval will give you a better sense of your price range.

Factor in a down payment amount based on your savings. Ideally you’ll put down at least 10-20% of the vehicle price. This will reduce the amount you have to finance.

Don’t forget to budget for tax, title, registration fees and any dealer documentation fees. These can add several hundred dollars to the vehicle price.

Account for higher insurance costs, gas, and maintenance for a new car. Run insurance quotes in advance so you know the premium amount.

Build some wiggle room into your budget in case prices are higher than expected. Have a maximum monthly payment you’re comfortable with and don’t go above it.

Setting a realistic budget will help ensure you get an affordable car loan that fits your current financial situation. Stick close to your budget maximums during the car buying process.


Shop Around for Best Deals

One of the best ways to get a good price on a car loan is to shop around and compare offers from multiple sources. With so many lenders eager for your business, a little shopping can go a long way towards saving money.

Start your research online, looking up current interest rates and incentives for new and used cars. Get a sense of what deals are available before ever setting foot in a dealership. You can even submit loan applications online to banks, credit unions and other lenders to get pre-approved. This gives you added negotiating power when it comes time to talk numbers.

Don’t limit yourself to one dealer or lot. Make sure to check pricing on the same make and model at various dealerships in your area. Competition between them will work to your advantage. Consider expanding your search region as well – you may find better offers a short drive away.

When speaking with salespeople, don’t feel rushed or pressured into any deal. Make it clear you are still shopping around, and walk away if you don’t get satisfactory terms. There will always be more options, so don’t settle for a high interest rate out of desperation. Stay patient and keep hunting for your best offer.


Avoid High Interest Loans

One of the biggest mistakes when financing a car is accepting a loan with extremely high interest rates. While you may get approved for these loans more readily, especially if you have poor credit, the extra costs end up being massive burdens.

Be on the lookout for predatory subprime lending practices that take advantage of those with less-than-perfect credit. These types of loans can have interest rates above 15% or even 20%, making the total repayment over the course of the loan drastically higher.

Similarly, title loans that use your car as collateral and payday loans that give you a quick cash advance against your next paycheck seem appealing but come with interest rates often above 30%. Defaulting on these loans can put your vehicle ownership in jeopardy.

The best way to avoid exorbitant interest costs is to take time to build your credit before financing a vehicle. Maintaining on-time payments, keeping credit card balances low, and limiting hard credit checks allows you to reach prime lending status and qualify for the best market rates on your auto loan.



Buying a car is one of the largest purchases most Canadians will make, so it’s important to explore all your financing options. As outlined in this guide, you have many choices when it comes to funding a new or used vehicle purchase.

Traditional loans from banks and credit unions offer competitive rates and flexible terms for buyers with good credit. Dealerships provide convenience but may have higher interest costs. Manufacturer incentives can lower your payments on select models. Personal loans are quick if you need funds fast. And leasing costs less per month but you don’t own the car in the end.

No matter which option you choose, the keys are to check your credit, compare different lenders, negotiate the best deal, and make a reasonable down payment if possible. Having flexible financing available makes owning a quality vehicle more accessible for Canadian drivers across the country.

So be sure to evaluate all your choices to find the ideal loan rates and terms that fit your budget. With the right financing, you can find the car you want while keeping your payments affordable.


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Questions About Financing a Car in Canada

The best way to finance a car in Canada is typically through your bank or credit union. Banks and credit unions often offer the lowest interest rates and most flexible loan terms. Getting pre-approved for an auto loan before visiting the dealership also puts you in a stronger negotiating position. Make sure to compare rates from multiple banks and lenders to find the best financing option for your needs.

Banks typically offer lower interest rates on car loans than dealerships. However, dealerships often have relationships with lenders that offer special financing incentives not available directly from banks. Dealers may also be more flexible on approving loans for those with poorer credit. Shop around with both to see whether a bank or dealership offers the best rates and loan terms for you.

You generally need a credit score of at least 650 to qualify for standard auto financing from most lenders in Canada. Those with scores in the good to excellent range (680+) will qualify for the lowest rates. If your score is below 600, you may need to explore alternative “subprime” financing options which have higher interest rates.

Dealers often advertise 0% financing deals to attract customers. However, these deals may require a shorter loan term or have limits on the total amount that can be financed interest-free. Carefully read the fine print, and compare any 0% offers to standard financing options from banks to see which saves you more money overall.

Typical documents needed to finance a car in Canada include: valid driver’s license, proof of income (recent pay stubs), proof of address (utility bill), proof of auto insurance, references (for new immigrants), and down payment. The lender may also ask for bank statements, tax documents, or other financial records to verify your ability to afford the loan.

Most experts recommend putting down at least 20% of the vehicle purchase price when financing a car in Canada. A higher down payment lowers the amount you need to borrow, which gets you better rates and loan approval odds. Putting down less than 20% is possible but will require paying higher interest and qualifying for financing may be more difficult.

Leasing usually makes more sense if you plan to get a new car every few years. Financing is typically better if you want to keep the same car long-term. Analyze the monthly payments, fees, mileage limits, ownership considerations and other lease vs finance differences to decide what works best for your situation.

Common fees to look out for when financing a car in Canada include: documentation/admin fees, lien registration fees, extended warranty costs added into the loan, prepayment penalties if you pay off the loan early, disposition fees at lease end, excessive interest rates, and extra charges for add-ons like GAP insurance.

As of 2023, the average interest rate for a new car loan in Canada is around 5.5% for a 5-year term. For used cars, average rates are closer to 7%. However, qualified buyers with great credit can often find rates between 2-4%. Those with poor credit may pay over 10% or be required to take a shorter 3 year loan term.

The keys to getting the lowest interest rate are having a strong credit score over 700, making a 20% down payment, choosing a shorter 3-year loan term, looking at new cars versus used, and shopping rates across multiple banks and lenders instead of just accepting what the dealer offers. Also look for promotional financing offers.

Most experts recommend a car loan term maximum of 5 years in Canada. Financing for longer than 5 years increases your interest costs and the likelihood of owing more than the car is worth when you go to sell it. If you need to stretch out payments over 6-7 years, it likely means you can’t realistically afford that vehicle.

The car loan payment formula factors in the vehicle purchase price, your down payment amount, the length of the loan term, and the interest rate offered. The payment calculator then determines the monthly principal and interest amount needed to pay off that auto loan over the set repayment period.

Most mainstream banks and lenders don’t offer specific student car loans. However, students over age 18 who have some personal income can qualify for standard financing. If you’re struggling to get approved, explore co-signing options to meet income requirements or look at manufacturer graduate programs like the Ford Student Program.

Those with bad credit scores below 600 do still have some options for financing a car in Canada. Subprime lenders like Carfinco and Rifco specialize in lending to borrowers with past credit problems. Interest rates are much higher but they can still get you approved. Saving up a bigger down payment also helps offset negative credit.


Yes, getting pre-approved for a car loan before visiting dealerships is highly recommended. Pre-approval locks in an interest rate and loan amount ahead of time, putting you in a much stronger negotiating spot with the dealer when it comes time to talk numbers and make a purchase offer.

The best places to get pre-approved for a car loan are your personal bank or credit union where you have an existing relationship, or through an online lender like or Having multiple pre-approvals from different institutions also gives you loan offer flexibility later on at the dealership.

Pre-approval benefits include locking in a guaranteed interest rate, speeding up the application process at the dealership, having negotiating leverage on the car price, knowing exactly how much vehicle you can afford, potentially securing limited time pre-approval discounts, and minimizing chances of having your deal rejected by a lender later.

Most Canadian lenders make pre-approved auto financing rates and terms valid for 30-90 days on average. If the pre-approval expires, you will likely need to reapply and get approved again at the current rates being offered. Some lenders allow extensions if you contact them before expiry.

Key tips include having exceptional credit, knowing the invoice price and fair purchase price for the specific vehicle, getting pre-approved financing from your own lender beforehand, being willing to walk away, pitting multiple dealership quotes against each other, looking at total cost of borrowing rather than monthly payments, and avoiding overpriced extras like rustproofing and extended warranties.

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