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How Do Auto Loans Work? The Comprehensive Beginner's Guide

how do auto loans work

Auto loans are a necessary evil in today’s society. Unless you have a huge nest egg saved up, you’ll need to take out an auto loan to buy your next set of wheels. You can go through a credit union, bank, or dealership.

But what’s the difference? And how do auto loans work in each case? Canada’s Best Auto Loan explains everything you need to know about auto loans in this comprehensive guide.

What is an auto loan?

An auto loan is a sum of money you borrow from a lender to purchase a car. The lender then charges you interest on the loan, and you have to make monthly payments until the loan is paid off.

Think of it as a mortgage, but for a car instead of a house. The main difference is that auto loans have shorter terms than mortgages, so you’ll pay off your loan much faster.

What are the different types of auto loans?

Let’s lay down the different types of auto loans so you can get a better idea of how they work. There are generally three main types of auto loans:

  • Bank auto loan
  • Credit union auto loan
  • Dealership financing

Each type has its own set of pros and cons, which we’ll be explaining. But the general idea is that bank auto loans will have the lowest interest rates, while dealership financing will be the easiest.

Bank auto loans

The most popular type of auto loan is a bank auto loan. Banks are big and well-established, so they can offer you some of the lowest interest rates. This means that you’ll save money in the long run.

The downside to bank auto loans is that they can be more difficult to qualify for. You’ll need a good credit score and a steady income. And if you don’t have either of those things, you might not be approved.

Credit union auto loans

The next most popular type of auto loan is a credit union auto loan. Credit unions are similar to banks, but they’re usually smaller and localized. The main advantage of credit unions is that they’re more likely to work with you if you have bad credit.

The downside of credit union auto loans is that they usually have higher interest rates than bank auto loans. This means that you’ll end up paying more in the long run. But if you can’t qualify for a bank loan, a credit union loan is a good second choice.

Dealership financing

The last type of auto loan is dealership financing. This is when you finance your car through the dealership where you’re buying it. 

The advantage of dealerships is that it’s usually the easiest type of loan to qualify for. In fact, you might not even need a good credit score.

The downside of dealership financing is that the interest rates are higher than bank or credit union auto loans. 

This means that you’ll end up paying more long-term. But if you need a car and can’t qualify for a loan anywhere else, then dealership financing is your best option.

How do auto loans work: the application process

auto loan works

Now that you know the different types of auto loans, and have researched the ultimate guide to buying used cars, let’s go over how to apply for a loan. Here’s a step-by-step overview of how auto loans go:

1. Figure out how much you can afford.

The first step is to figure out how much you can afford. You need to consider both the price of the car and the state of your finances. If you have a lot of debt, it might be difficult to get approved for a loan.

The best way to figure out how much you can afford is to use an online auto loan calculator. You can input the price of the car, your down payment, and your credit score. The calculator will then tell you what your monthly payments will be.

If you can’t afford the monthly payments, you might need to lower your price range. Or, you can try to get a co-signer with good credit.

2. Do some research on different lenders.

The next step is to do some research on different lenders. It would help if you looked at both banks and credit unions. Compare interest rates, fees, and the application process.

The best way to do this is to use an online lending marketplace or an online platform like Car Deal Canada that looks for the best auto loan for you. You can input your information once with these platforms and then get multiple offers from different lenders.

These platforms will allow you to compare different lenders side-by-side. And they’ll even help you get pre-approved for a loan.

Once you’ve found a few lenders you’re interested in, it’s time to move on to the next step.

3. Gather your documents.

The next step is to gather your documents. You’ll need things like your driver’s license, proof of income, and proof of insurance. Have all of these things ready before starting the application process.

If you’re unsure what you need, you can always call the lender and ask. They’ll be able to tell you what documents you need to provide.

4. Apply for the loan.

Once you have all of your documents, you’re ready to apply for a loan. You can do this online, over the phone, or in person.

If you’re applying online, you’ll need to fill out an application form. This will ask for your personal information, employment information, and financial information.

If you’re going for online car financing in Canada, you can apply with Car Deal Canada. We’ll help you get pre-approved for a loan and then match you with the best lender for your needs.

If you’re applying over the phone or in person, you’ll need to provide all the same information as you would online. The only difference is that you’ll be doing it verbally.

5. Wait for loan approval.

After applying for the loan, all you can do is wait for the approval. The lender will look at your application and decide if you’re a good candidate for a loan.

If you are, they’ll send you an offer with the terms and conditions of the loan. This will include the interest rate, monthly payments, and loan term.

If you’re not approved for a loan, the lender will send you a letter explaining why and you can then use this information to improve your chances of getting approved the next time.

How do auto loans work with private sellers?

Private sellers are individuals who are selling their cars without the help of a dealership. Auto loans for private sellers work in the same way as they do for dealership sales.

The main difference is that you’ll work with the seller directly to negotiate a price and finalize the sale. If you’re looking to finance a car from a private seller, we recommend getting pre-approved for an auto loan before doing anything else. This will give you a better idea of your budget and what you can afford.

If you’re interested in getting an auto loan from a private seller, we can help. Car Deal Canada has the best auto sales leads and a wide network of private sellers that we work with. We can help you get pre-approved for a loan and then match you with the perfect seller for your needs.

Final Thoughts

Buying a car is a big financial decision. And taking out an auto loan is one of the most important aspects of buying a car. We hope that this guide has helped you understand how auto loans work, taking you one step closer to your dream car. 

Find Your Car Deal Today

From start to finish there is no better and more transparent way
to buy a car. Find out if you qualify in under 60 seconds