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How Long Are Car Loan Terms in Canada

How Long Are Car Loan Terms in Canada

With new and used vehicle prices continuing to rise, it’s no surprise that car buyers are taking out longer auto loans to help lower the monthly payments. Where most car loans were once in the 3-5 year range, terms of 6-8 years have now become quite common. This allows consumers to drive away in more expensive and better-equipped cars that may have been out of reach with a shorter loan. However, before signing on for one of these lengthy 72, 84 or even 96-month car loans, it’s important to understand the financial implications down the road.


While the allure of lower monthly payments is attractive, long loan terms also mean you’ll be paying significantly more interest charges over the life of the loan. There’s also a higher risk of ending up “upside down” on the loan, owing more than the vehicle is worth. Carefully weighing the pros and cons of longer financing will ensure you choose the right loan term to fit your budget and plans.

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Average New Car Loan Length

Data shows the average new car loan term is between 60-72 months. According to Experian, the average new car loan in Q4 2022 was 67.87 months, or almost 6 years. This is up from 66 months at the end of 2021. Loans of 72-84 months have become very common for new vehicle purchases.

For example, according to Edmunds data, the average loan term for a new car in Q1 2022 was 68.4 months, over 5 and half years. They found 42% of new car buyers took out loans of 61-72 months. Another 18% opted for even longer 73-84 month loans. So over 60% of new car buyers finance for at least 5 years.

Experts say the trend towards longer new car loans is being driven by several factors. First, new car prices keep rising, with the average transaction price now over $47,000 in Canada according to J.D. Power. With higher prices, longer terms are needed to make monthly payments affordable.

In addition, interest rates are still relatively low by historical standards, making longer loans more palatable. Lenders have also become more willing to approve longer loan terms due to the higher amounts financed. So 6 and even 7 year new car loans have gone mainstream.

 

Average Used Car Loan Length

Used vehicles are generally financed for shorter terms than new models. According to data from credit bureau Experian, the average used car loan length in the fourth quarter of 2022 was 64 months, or around 5 1⁄3 years. Their analysis found the most common used car loan term was 60 months at 19.95% of loans. The next most prevalent lengths were 72 months at 17.87% and 66 months at 11.28% of loans.

For buyers with excellent credit, used car loans averaged 62 months. But subprime borrowers with credit scores below 600 took out longer 73 month average loans. Used car financing can range from 24 to 84 months for most borrowers. However, the longer the loan term, the higher the interest charges will be over the life of the loan.

 

Trend Towards Longer Loans

In recent years, there has been a clear trend towards longer auto loan terms. As new and used car prices continue to rise, buyers are stretching out loan lengths to 72, 84 and even 96 months to make the monthly payments more affordable.

According to Experian automotive data, the average new car loan term reached 68 months in Q3 2022, up from 66 months in 2021. For used cars, the average loan term also hit 68 months, compared to 65 months the year prior.

When looking at the share of loans by term length, Experian found that 29% of new car loans and 16% of used car loans originated in Q3 2022 had terms of 73-84 months. Loans with 85-96 month terms accounted for 8% of new and 6% of used car loans.

Clearly, 6, 7 and 8 year car loans are becoming more mainstream. For buyers focused on lowering their monthly payment, the trend makes longer loan terms an attractive option. However, the longer the loan, the more interest paid over time – an important trade-off to consider.

 

Pros of Long 72, 84 and 96 Month Car Loans

Taking out longer car loan terms of 72, 84 or even 96 months can seem very appealing to buyers for several reasons:

 

Lower Monthly Payments

The #1 reason most car shoppers opt for extended loan terms is to lower their monthly payment. Stretching out financing over 6-8 years instead of the standard 60 months allows you to drastically reduce your payment amount. For example, on a $30,000 loan at 4% interest, a 60 month term would be around $545 per month. But going to a 72 month term drops it to $455 per month – a difference of $90 monthly. This lower payment can allow buyers to afford the car they really want while staying in their budget.

 

Buy a More Expensive Vehicle

Since the monthly costs are reduced with a longer loan, borrowers can qualify to finance a more expensive vehicle than they could with a shorter 36-60 month loan. If your budget can handle a $500 monthly car payment, a 72 month loan may allow you to buy a $35,000 car vs being limited to a $25,000 car on a shorter term loan. The longer financing terms provide the ability to buy newer cars with more features.

 

Build Credit with On-Time Payments

One potential benefit of taking a 6-8 year new car loan is the opportunity it provides to build your credit history. By making on-time payments over this extended period, you can demonstrate responsible usage of credit. This will help improve your credit score over time, especially if you have limited existing installment loan history. Just be sure to make payments on time each month.

 

Cons of Long Car Loans

While lower monthly payments may seem appealing, there are some significant downsides to taking out long 72, 84 or 96 month car loans that buyers should carefully consider:

 

Higher Interest Costs

The longer the term of the loan, the more interest you will pay over the full repayment period. For example, if you finance a $30,000 car purchase:

 

  • On a 4-year loan at 4% interest, you would pay $2,387 in total interest
  • On a 6-year loan at 4% interest, you would pay $3,822 in interest
  • And on an 8-year loan at 4% interest, you would pay $5,548 in total interest

 

That’s more than double the interest costs over the length of the loan, which adds significantly to the overall cost of the vehicle.

 

Risk of Negative Equity

Negative equity occurs when you owe more on the car loan than the vehicle is actually worth. This happens because cars depreciate rapidly in the first few years. With longer 6-8 year loans, you are very likely to end up “upside down” on the loan well before it’s paid off if you want to trade it in for another car. This makes it very difficult to get out of the loan since you would need to come up with extra money to cover the difference.

 

Outlasts Warranty Coverage

Most new car warranties cover 3 years or 36,000 miles. Extended warranties may go up to 5-6 years. However, if you take out a 7 or 8 year loan, you are likely to own the vehicle beyond the warranty period leaving you responsible for potentially costly repairs.

 

Interest Cost Comparison

When choosing a car loan term, it’s important to look beyond just the monthly payment amount. The total interest paid over the full loan duration can vary significantly between shorter and longer terms.

For example, let’s say you take out a $30,000 loan at an interest rate of 5%. Here’s a comparison of total interest paid for loan terms of 36 months, 60 months and 72 months:

 

  • 36 month loan: Total interest = $1,871
  • 60 month loan: Total interest = $3,119
  • 72 month loan: Total interest = $3,743

 

As you can see, the longer 72 month term results in paying over $1,800 more in interest compared to the 36 month loan. That’s extra money that could have gone towards paying off the principal.

Online car loan calculators can help you easily compare total interest costs for various loan terms. It’s important to not just focus on the monthly payment when choosing a term, but take a big picture view of the overall interest expenses.

 

Negative Equity Explained

Negative equity occurs when you owe more on your auto loan than the car is actually worth. This happens when vehicles depreciate faster than the loan balance decreases. Longer car loans increase the risk of ending up upside down.

For example, you purchase a new car for $30,000 and finance it for 6 years. After 3 years, the car may only be worth $18,000 on the used market due to depreciation, but you still owe $21,000 on the loan. This leaves you with $3,000 in negative equity.

The problem worsens if you want to trade in the car before paying off the loan. The dealer will appraise the car based on current market value, not what you still owe. With negative equity, you either have to come up with extra cash to cover the difference, or roll the remaining balance into a new car loan.

Rolling over negative equity leads to being further underwater on the next car. It can quickly snowball into owing thousands more than your vehicle is worth if trading in every few years. This makes it very difficult and expensive to get out of the cycle.

To avoid negative equity, experts recommend shorter loan terms so you pay down the principal faster. If you do finance for 6-7 years, planning to drive the car until the loan is paid off greatly reduces the risk of being upside down.

 

Warranty Coverage Impact

When buying a new car, an important consideration with longer loan terms is the potential to outlast the manufacturer’s bumper-to-bumper warranty, which typically covers 3 years or 36,000 miles. For example, if you take out a 6-year/72-month loan, you may only have warranty coverage for the first half of the loan term. This leaves you unprotected for expensive repair bills for the remainder of the loan as the car ages.

Likewise, with an extended 7 or 8 year financing term, you are very likely to have paid off the car loan before the warranty has expired. This gap in coverage can leave you exposed at the very time repairs become more likely on an aging vehicle.

While you can purchase extended warranties for additional protection, they add cost to the transaction. It’s important to weigh the warranty expiration date against your loan length. Opting for shorter loan terms when possible can help better align with the manufacturer’s included warranty period.

 

Tips for Choosing the Right Car Loan Length

When it comes to selecting the ideal auto loan term, there are some best practices to keep in mind based on whether you are buying new or used:

 

New Cars:

  • Aim for 60 months or less. This keeps your total interest costs lower and reduces the risk of negative equity.
  • Calculate payments for 48 and 60 month loans to compare costs.
  • Only consider 72 months if you plan to keep the car for the full loan term.

 

Used Cars:

  • 36 months or less is ideal to save on interest and build equity.
  • 48 month maximum if the vehicle is 2-3 years old.
  • Never exceed 60 months on used car loans.

 

While longer terms may seem tempting for lower payments, limiting auto loans to 60 months or less whenever possible is a smart financial move for most buyers.

 

Getting Pre-Approved

One of the best tips for choosing the right car loan length is to get pre-approved for financing before visiting dealers. This allows you to understand all of your loan options upfront. There are several key benefits to getting pre-approved:

 

  • Know Your Real Budget – When you get pre-approved, you’ll receive estimates of the loan amounts, terms and interest rates you qualify for based on your credit and income. This gives you a realistic budget range before ever stepping foot in the dealership.
  • Stronger Negotiating Position – With financing already secured, you won’t need to accept whatever terms the dealer offers. This puts you in a much stronger position to negotiate the purchase price and any financing offers.
  • Faster Buying Process – Having a pre-approval letter speeds up the purchase process since the financing is already lined up. You can focus on the purchase details rather than spending hours filling out applications at the dealership.
  • Avoid Dealer Financing Traps – Dealers make a lot of their profit from arranging financing, and may steer buyers towards loans with higher rates or longer terms. With your own pre-approval, you can avoid these extra costs.

 

While getting pre-approved requires some time upfront, the knowledge and negotiating power it provides makes it time very well spent in the car buying process.

 

Estimating Payments

A car loan calculator is an essential tool to help estimate your monthly payments based on the loan amount, interest rate and term. Online calculators allow you to plug in different loan scenarios to see how it impacts the monthly and total cost.

To use a car loan calculator:

 

  • Enter the vehicle purchase price
  • Input your estimated down payment amount
  • Enter the loan term in months (ex. 60 months)
  • Input the interest rate offered by the lender
  • Select if sales tax will be included in the loan
  • Choose whether the loan calculation should factor in trade-in value

 

The calculator will estimate your monthly payment amount along with the total interest paid over the life of the loan. You can adjust the variables like down payment and loan term to see how it changes the costs. This allows you to find the ideal loan length and term to fit your budget.

Online car loan calculators offer an easy way to estimate payments for different loan scenarios. Comparing the monthly and total costs side-by-side makes it simple to choose the best financing terms before visiting a dealer.

 

Know Your Budget

One of the most important steps when choosing a car loan length is to know your budget and set a realistic monthly payment amount you can afford. Take a close look at your income, expenses, debt payments and savings to determine how much room you have for a car payment each month.

Make sure to account for insurance, gas and maintenance costs on top of the loan payment. Experts recommend your total monthly car expenses be no more than 10-15% of your take home pay. If you already have other loans or financial obligations, keep those in mind as well.

Online car loan calculators can help estimate payments based on different loan terms, interest rates and down payments. Plugging in different scenarios will give you an idea of monthly payments you are comfortable with over 3-5 years. Going into the dealership knowing your budget will make it easier to choose the right financing length.

Setting a realistic budget and payment cap based on your financial situation is crucial. While longer loans may advertise lower payments, make sure you aren’t stretching your budget too thin. Know your limits and shop for a car you can truly afford over the short to mid-term.

 

Consider Future Plans

When choosing a car loan term, it’s important to think about how long you realistically plan to keep the vehicle. If you typically drive cars for 5-6 years and then trade them in, financing a car for 72 months or longer means you will likely be stuck with negative equity when it comes time to get your next car.

Try to match the loan term to how long you expect to own the car. If you drive vehicles for 4-5 years on average, a 48 or 60 month loan would be a better fit. This way you will pay off a good portion of the loan by the time you are ready for your next car, and avoid being upside down.

Also consider upcoming life circumstances that may impact your car ownership. For example, if you plan to start a family in the next 2-3 years, you may want to transition to a family vehicle sooner than later. Or if you expect to move or change jobs, your transportation needs could change.

The last thing you want is feeling forced to keep an expensive car for 7+ years because you are trapped in a lengthy loan. Aligning your loan term with realistic ownership plans gives you more flexibility down the road.

 

Conclusion

In summary, when financing a new or used vehicle, carefully consider the implications of choosing a longer 72, 84 or even 96 month car loan. While the lower monthly payments may seem attractive initially, the extra costs, risks and restrictions over the full loan term need to be weighed against short term benefits.

To choose the optimal financing length for your situation, run the numbers to see total interest paid over time and calculate what loan terms provide affordable payments that fit your budget. Also think about how long you typically keep cars, your future plans for the vehicle, and the downside of negative equity on future trade-ins.

Getting pre-approved can provide a clear picture of the loan terms available based on your credit and finances. This allows you to make an informed decision on the best loan length to match your ownership plans.

Taking these steps will ensure you don’t end up locked into an excessively long car loan that brings unnecessary extra costs and financial constraints.

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Questions About Car Loan Term Lengths

In Canada, the average car loan term is around 72 to 84 months, or 6 to 7 years. Most lenders offer terms from 24 to 96 months. The most common terms are 60 to 72 months for new cars and 36 to 48 months for used cars. Longer terms like 84 or 96 months are becoming more common for new cars as vehicles get more expensive.

Pros:

– Lower monthly payments

– Ability to afford more expensive vehicles

 

Cons:

– Pay significantly more interest over the life of the loan

– At risk of being “upside down” if car depreciates faster than loan pays down

– Still making payments long after vehicle warranty expires

 

Overall, shorter loan terms are recommended whenever possible. But longer 6 or 7 year loans may be the only way some buyers can afford the vehicles they need.

The average monthly car loan payment in Canada is around $450-650 for new vehicles and $350-450 for used vehicles. However, the average car price has risen substantially in recent years, pushing loan amounts and monthly payments higher. With longer loan terms, monthly payments can stay under $500 even with pricier vehicles.

To get the best car loan interest rates in Canada, you generally need a credit score of at least 720. Prime borrowers with scores over 760 can qualify for rates around 3-5%. Subprime borrowers with scores under 620 will pay significantly higher rates from 8-15% or more.

Most experts recommend a 20% down payment on a new car loan and a minimum of 10% down on used vehicles whenever possible. This helps ensure you don’t end up owing more than the car is worth. However, $0 down promotions are common – trading off higher monthly payments for lower upfront cost.

Most Canadian lenders top out their car loan terms at 84 months (7 years). But a small number of lenders now offer terms up to 96 months (8 years) – especially for new vehicles. Loans longer than 6 years come with higher interest costs and other drawbacks though.



The big Canadian banks often have the most competitive rates for prime borrowers with good credit (720+ scores). Options include:

 

– RBC Royal Bank

TD Canada Trust

Scotiabank

CIBC

– BMO Bank of Montreal

 

Credit unions and online lenders also offer competitive rates in many cases.

Those with poor/bad credit (scores below 620) have fewer options, but can still get approved for a car loan from subprime lenders like:

 

– Carfinco

Rifco National Auto Finance

AutoCapital Canada

– TD Bank

 

Expect to pay significantly higher interest rates due to the increased risk.

Typical documents needed for a Canadian car loan application:

 

– Proof of income – recent pay stubs or tax documents

– Proof of address – utility bill, bank statement etc.

– Proof of auto insurance

– Down payment funds – bank statements, loan approval etc.

– Valid driver’s license

– Past auto credit history – previous loan/lease documents

Car loan interest rates in Canada depend primarily on:

 

– Your credit score and history

– Loan term length (rate is higher for longer loans)

– Size of down payment (larger down payments get better rates)

– Make/model of vehicle (rates are higher for risky/expensive vehicles)

 

So work on improving your credit, saving for a decent down payment, and shopping for reasonable vehicles to secure the best rate.



For a $40,000 car loan in Canada over 6 years at 5% APR, you would pay about $5,763 in interest over the life of the loan, on top of repaying the $40,000 principal. That’s $144 monthly just toward interest costs. Opting for a lower rate on a shorter 3-4 year loan term could save thousands in interest.

Standard fees on a Canadian car loan include:

 

– Interest charges

– Documentation fee – $50-$150

– Lien registration fee – around $20-$60

– Extended warranty fee (if purchased)

– Sales taxes

 

Avoid loans with prepayment penalties or balloon payments. Ask lenders to detail all fees.



Yes, getting pre-approved for a car loan in Canada before visiting dealerships can give you strong negotiating leverage and save you money. Dealers make a lot of profit financing vehicles themselves at higher rates. With a pre-approval from your bank or credit union for a lower rate, you take financing out of the equation.



Tips for getting the lowest car loan interest rate in Canada possible:

 

– Have a credit score over 720

– Get pre-approved for financing

– Shop around with multiple lenders

– Put at least 20% down

– Keep the loan term under 6 years

– Buy a reliable used vehicle instead of new

 

Every little bit helps reduce the rate. Compare all your financing options.v

Paying off a car loan faster than required or ahead of schedule in Canada can save you thousands in interest costs. Even an extra C$100 a month toward the principal can shave years off a 6-7 year loan. Just make sure your lender doesn’t charge prepayment penalties. Pay down highest interest debts first.

Making late car loan payments in Canada triggers late fees from lenders (around $30-$50 typically) and can severely damage your credit score. If you cannot make payments, immediately contact your lender to discuss options – they may allow deferrals in hardship cases. Ignoring missed payments can lead to vehicle repossession.

Trading in a vehicle you still owe payments on involves a couple steps. First, the dealer provides a trade-in value and applies it toward your new purchase. Then your existing lender is paid off completely with the trade equity as part of the new loan. Any difference rolls over into the new auto loan.

Financing buying a car tends to cost less in the long run compared to leasing in Canada. With financing, your payments go toward eventually owning the vehicle after the loan is paid off in 5-7 years typically. Lease payments offer lower monthly costs but you own nothing afterwards – you would need to lease again or buy.

Car loan terms to generally avoid in Canada include:

 

– 96 month (8 year) loans – too long, with excessive interest costs

– 0% down promotions – lead to immediate negative equity situation

– Prepayment penalties – expensive fees for paying loan off early

– Balloon payment loans – large lump sum payment still due at end

 

Stick to 60-72 month loans from reputable lenders with no hidden fees.

If you owe more on your car than it’s current resale value – meaning you’re “upside down” or “underwater” on the loan – you have a few options in Canada:

 

  1. Keep driving the car longer until you have positive equity
  2. Refinance loan to lower rate and/or extend term
  3. Add money to pay down principal
  4. Voluntary vehicle surrender

 

Being underwater on a car loan is difficult to resolve and limits your choices going forward. Try to avoid by not overpaying initially or putting enough down.

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