HelloSafe » Car Loan
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Summary
Did you know that the average cost of a new vehicle in Canada now exceeds $40,000?
That is a lot of money! Fortunately, an auto loan can help you get into a car or truck today.
Have your eyes set on a new car? Unsure where to start? You are in the right place.
Here is HelloSafe’s definitive guide to getting car loans in Canada. Compare rates. Check review. We will show you what to look out for and help you find the best loan for you.
What is a car loan?
A car loan is simply a loan to help purchase a new or used vehicle.
Whether it is new or just new to you, you may not have the money to buy a car or truck outright. A car loan gives you the option to pay in installments over several years. The installments can stretch from 24 to 96 months. Interest rates are lower than many other types of loans because the vehicle itself serves as collateral. The lender can repossess the car or truck if the borrower does not pay back the loan.
Financing is available from diverse sources, including dealerships, traditional banks, and online lenders.
| What type of lender is best? | Pros | Cons |
|---|---|---|
| Dealerships |
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| Banks/credit unions |
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| Online lenders |
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How do I calculate car loan interest?
A car loan’s interest rate depends on the amount it costs the lender to borrow money and how risky a borrower’s profile is. Interest rates increase as a loan gets longer. Higher monthly payments can save you money in the long run if it means a shorter loan.
Use our car loan calculator to estimate monthly payments and loan amortization.
How does car loan interest work?
A car loan's interest rate depends on the amount it costs the lender to borrow money and When you get a car loan, the bank owns the title to that car until you reimburse it. You pay back the amount borrowed with interest over an agreed-upon time frame. Installments are usually monthly, but some lenders offer different frequencies like bi-monthly. Each installment goes towards a portion of the total borrowed (the principal) and interest. Early on, a large percentage of each payment goes towards interest. Over time the principal is paid back, and less of each payment goes toward interest. Once you complete reimbursing the loan, you own the title to the car.
To give a simple example:
Good to know
Imagine you borrow. $20,000 to buy a truck. The interest rate is 5%, and the loan is due over 48 months. You owe $460.59 per month. When the loan is paid off you will have paid a total of $22,109 - the $20,000 principal plus $2,109 in interest.
| Year | Beginning Balance | Interest paid | Principal paid | Ending Balance |
|---|---|---|---|---|
| 1 | $20,000 | $895 | $4,632 | $15,368 |
| 2 | $15,368 | $658 | $4,869 | $10,499 |
| 3 | $10,499 | $409 | $5,118 | $5,381 |
| 4 | $5,381 | $147 | $5,380 | $0 |
| Total | - | $2,109 | $20,000 | - |
Good to know
If you can afford the higher money payments, opt for a shorter term and save money on interest.
How do I calculate how much of a car loan I can afford?
Unsure how much you can spend? Try a car loan calculator to quickly calculate your monthly car payments. Remember that a car loan is not the only expense when buying a car. There is insurance, gas, maintenance, parking, taxes and more to consider. A good rule of thumb is to limit car payments to around 10% and overall expenses to under 15% of take-home pay.
For example, if you make $5,000 a month aim to keep your total budget under $750 per month. That is $500 for the car payments with $250 left for additional expenses.
Watch out!
The costs of owning a vehicle quickly add up. Be careful not to spend beyond your means.
What is a pre-approved car loan?
A pre-approved loan is a loan that you are approved for before you go shopping.
Before heading to a dealer, you speak with a lender. You submit initial information. They give you pre-approval to borrow up to a certain amount. Pre-approval helps you determine a realistic budget for your next vehicle before you start shopping. Learn what you can afford and get an estimate of what your car loan rates will look like ahead of time. It is a great time-saver!
How do I get approved for a car loan?
Getting approved is usually a quick process. You can apply for a car loan at a dealership itself, with your bank, or online. Before making a decision, shop around! You can compare rates using HelloSafe’s car loan comparison tool up top.
Lenders will ask you for the following:
- To authorize a credit check
- Photo ID
- Proof of income
- Proof of residency
- Proof of car insurance
Watch out!
A lender may be required to perform a hard credit inquiry to approve you. Be aware that this can have a temporary negative effect on your credit score. Fortunately, multiple inquiries for the same type of loan over a short period are usually counted as one.
How do I get a car loan for a pre-owned or used vehicle?
Financing exists for used cars and trucks sold by a dealership or by private sellers. Dealership or their banking partner may offer them. They resemble a loan for a new vehicle. If you buy a used car in a private sale, your lender a traditional car loan may not be available. In this instance, a personal loan is an option. Typically unsecured by the vehicle itself, the interest rate on a personal loan for a used car will be higher than a traditional car loan for a new one.
Good to know
Considering buying a used car with a personal loan? See HelloSafe’s personal loan guide to learn more.
What is a good interest rate for a car loan?
Currently, under 6% is considered a good interest rate for borrowers with a credit score in the mid 600s.
Interest depends on your credit score, the amount borrowed, the loan term and your debt-to-income ratio. Borrowers with excellent credit may be eligible for lower interest rates as low as 2 or 3% for a new vehicle. Occasionally dealerships will even offer a 0% interest car loan as a special promotion (but read the fine print!). For a borrower with fair or poor credit, the rate can exceed 10% or even 15%.
Here is how lenders weigh your credit score:
| Credit score range for a car loan | Category |
|---|---|
| 760+ | Excellent |
| 725-759 | Very good |
| 660-724 | Good |
| 659-560 | Fair |
| 559-300 | Poor |
Good to know
New cars are usually eligible for lower interest rates than used cars.
Top tips for saving money on your car loan:
The interest rate and the length of your car loan have a big effect on the total interest you will pay. As cars have gotten more expensive, the length of car loans has increased. Once unthinkable, the most popular term length in Canada today is 84 months. That is seven years! 96-month (eight-year) loans are even available.
Just look at what a difference three years and 3% makes:
| Loan terms | Loan A | Loan B |
|---|---|---|
| Total borrowed | $40,000 | $40,000 |
| Interest rate | 3% | 6% |
| Length of the loan | 60 months | 96 months |
| Monthly payment | $575.00 | $420.53 |
| Total interest paid | $2,599.89 | $8,370.47 |
This example assumes that you borrow $40,000 for a car purchase (the average cost of a new vehicle today). While the monthly payments of loan A are $154.47 more, loan B costs $5,770.58 more! Compare interest rates and limit the length to save serious money.
What minimum credit score is required for a car loan?
Most buyers with a score of 660 and sufficient income can easily get approved for a car loan from a traditional bank or credit union.
There is, however, no explicit rule about what score is required for a car loan. Beyond credit, lenders also evaluate loan applications on their employment history, income, the value of the car, and more. Below that 660 score threshold, alternative lenders can be an attractive option. They offer more flexible standards, albeit at less favourable rates.
Want to see what kind of car loan you can qualify for? Use the comparison tool below:
How can I get a car loan with bad credit?
It is still possible to get an auto loan with bad credit. Credit history is not the only factor considered by lenders. They will also look at the size of your down payment, your financial statements, and your employment history. Having a co-signer or guarantor with a better credit score can also help.
Remember that you are more likely to be approved for a smaller loan, so consider a less expensive car. You should expect to pay a higher interest rate than a borrower with a better credit score. Borrowers with fair or poor credit can pay in excess of 10 or 15%. A shorter loan term can help offset this expense.
Good to know
Good news! Paying your car loan back on time every month is a fantastic way to improve your credit score.
How do I get out of a car loan?
Assuming that your car is worth more than the remaining balance on your car loan, the easiest way to get out of a car loan is by selling that vehicle. Then immediately use the money you receive to finish paying off your loan. Remember, until you pay off the loan, you do not own the title to the car. Most lenders will allow you to sell it under the condition that the sale covers the remainder of what you owe.
Can you pay off a car loan early?
Yes! Check your contract conditions for details. Some lenders allow borrowers to pay off car loans early without a penalty or fees. This is a great way to save on interest payments.
When to pay it off early
- You do not have other debts
- You have an emergency fund
- To save money on interest
- To get rid of a monthly payment
When to avoid paying it off early
- You have other debt at a higher interest rate (mortgage, credit card, student loans, etc.)
- There is an excessive prepayment fee*
- To build your credit score
*Prepayment penalties are a possible disadvantage to paying off your loan early. Many loans do not have them, so check your terms and conditions.
Can I refinance a car loan?
It may be possible to refinance your car loan. When you refinance, a new lender buys your remaining debt. Then they offer a new contract under more favourable terms. Favourable could mean extending the length of the loan to lower your payments, decreasing the interest rate or removing a co-signer.
This option can make sense if some time has passed since you bought your car and your credit score has since increased.
How do you transfer a car loan to another person?
Unfortunately, it is not always possible to transfer a loan to someone else. As each lender has different conditions, it is best to check the terms and conditions of your current contract.
Depending on the length of the loan and the vehicle’s age, it is possible to owe more than the car is worth on the resale market. A bank is unlikely to sign a new loan agreement against a depreciated vehicle.
How can I remove a co-signer from a car loan?
It is often possible to remove a co-signer from a car loan, provided your credit score or financial situation has improved since signing the original loan.
Everyone’s situation is different, so it is best to speak with your lender. As you are already negotiating loan terms, this is an opportunity to refinance your loan if you wish to do so.
What is the APR on a car loan?
APR is the annual percentage rate or the annual cost of a loan with fees. Unlike the interest rate, it includes additional charges like application and service fees. It better shows the real cost of borrowing money. Use HelloSafe's auto loan calculator to see the APR. To calculate APR you can use this formula:
APR = (((fees+interest) ÷ principal) ÷ days in a loan term x 365 ) x 100
Good to know
When comparing car loan offers, be mindful that you are comparing APR to APR. Different lenders apply different fees, so looking at only the interest rate can be misleading.
What are the best banks for car loans?
There are too many lenders to list here, but many major banks and credit unions offer car loans. Dealerships often offer financing to well-qualified borrowers. Online lenders are increasingly entering this marketplace.
Here are some popular lenders:
- BMO car loans
- CIBC car loans
- Desjardins car loans
- RBC car loans
- Scotiabank car loans
- Smarter Loans
- TD Bank car loans
Want to check rates right now? You can with our comparison tool:
Our guides on auto loans
- Smarter Loans Car Loans Review for 2023
- How to Refinance an Auto Loan in Canada? (2023)
- BMO Auto Loans Review (Updated 2023)
- TD Auto Loans Review (Updated 2023)
- Scotiabank Auto Loans Review (Updated 2023)
- RBC Auto Loans Review (Updated 2023)
- Desjardins Auto Loan Review (2023)
- CIBC Auto Loans Review 2023
- How to Get Approved for a Car Loan with Bad Credit
- Auto Loan Calculator Canada: How Much Will You Pay?
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