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A car is an indispensable part of any Canadian’s life, just like a home, and both can be the most important purchases an individual or family makes.
Whether you’re looking to buy or lease a car, it’s essential to do your research and make sure you can afford all the costs in the long run. You need to understand everything about car loans and how they can affect you financially when you buy a car.
Proper documentation for a car loan
When you buy something on credit, you are financing it instead of paying for it with cash. You will then pay the creditor in monthly installments, including interest.
To apply for a car loan, you need to gather information and documents to prepare your application.
Your dossier de crédit and credit score
You can get a lower interest rate if you have a higher credit rating. So you need to improve your credit rating in advance. To do this, pay off all outstanding debts and credit card balances.
If you need to check your credit score, you can do so for free with many credit card issuers.
Gather information about the car you want to buy
To determine the price and terms of your car loan, you must tell the lender the make and model of the car you wish to purchase.
Your personal and financial information
The lender will want all your personal information, such as your full name, current address, date of birth, etc. The lender will ask you for information about your rent or mortgage payments, any outstanding debts, and anything else about your financial situation. Keep a copy of your bank statements as they may also be required.
Bring a copy of your driver’s license, as you may be considered more likely to repay your loan.
Your income and employment history
You may be asked to provide proof of your employment history for the past three years. To provide proof of income, a Notice of Assessment is sufficient.
Proof of bank details
Your lender may ask you to provide a voided check and have you complete a pre-authorized payment form. Your lender will use this form to automatically withdraw payments directly from your bank account.
Who makes car loans?
There are three ways to get a car loan in Canada.
- Dealer Financing – You can apply for financing through the dealer from whom you purchase the car. This is a practical option, although it is wise to study the different interest rates.
- Credit Unions and Banks – Your approved loan amount will be deposited directly into your bank account if you obtain the loan through a credit union or bank. Also known as a “direct loan”, you will be able to use the money in your account to purchase the car of your choice.
- Online Lenders – Getting an auto loan online is the easiest way to do it, because you can do it from home. Since you do everything online, you can compare rates and find the one that suits you best.
Interest rates
When you apply for a car loan, you get money to pay for the car, and you will have to pay back the loan plus interest over a period of time. Your interest rate will depend on your credit score. Thus, a higher score will result in a lower interest rate and vice versa.
Reputable lenders offer fixed annual rates so that your interest does not fluctuate each month.
Conditions of reimbursement
Your monthly payment is affected by the length of the term, the amount you borrow and your interest rate. You can choose the repayment period according to your budget.
The standard repayment term is 36 to 72 months, but you can lower it if you choose a longer repayment term. If you want to reduce the repayment period, your monthly payments will be higher.
You can use an online car loan calculator to get an idea of what your monthly payment will be.
New or used car: the rate effect
The interest rate often matters more than the sticker price. At a dealership, financing for a new vehicle may go through the automaker's financing division, which sometimes offers very low promotional rates, as low as 0% under certain conditions. These incentives target new vehicles. For a used vehicle, the rate depends more on the lender and your credit score.
| Annual rate | Monthly payment | Total interest | Total cost |
|---|---|---|---|
| 1.99% | $438 | $1,285 | $26,285 |
| 4.99% | $472 | $3,300 | $28,300 |
| 7.99% | $507 | $5,407 | $30,407 |
| 11.99% | $556 | $8,359 | $33,359 |
That is why a new car can cost less to finance than a cheaper used car. For example, over 60 months:
- New car at $30,000 and 1.99%: $1,542 in interest, $31,542 in total
- Used car at $25,000 and 9.99%: $6,863 in interest, $31,863 in total
- Difference: $321 more for the used car, despite a price that is $5,000 lower
The Financial Consumer Agency of Canada therefore recommends looking at the total cost, not just the payment or the rate. Promotional rates change often; these examples, calculated in September 2026, exclude taxes and fees.
Paying off a car loan with a line of credit
A line of credit often carries a lower rate than a car loan, but that rate is usually variable. Before moving your balance, check three things:
- Loan type: your credit agreement states whether the loan is open or closed. Confirm with your lender whether any prepayment charges apply.
- Paying down principal: the minimum payment on a line of credit is usually the month's interest. Set a payment that clears the balance within the same timeframe as your current loan.
- Rate increases: on a $16,000 balance repaid over 54 months, going from 8% to 6.05% cuts interest by about $790 ($3,105 vs. $2,317), provided the line of credit rate does not rise.
How many cars can you finance?
Depending on your financial situation, you can have more than one car financed at a time. Check your credit rating and budget to see if this is an affordable option for you. If you can afford to pay off more than one car loan, you may want to consider financing two or three additional cars simultaneously.
However, it may be wise to consider financing only one at a time, as you don’t want to find yourself in an uncomfortable financial situation in the distant future when things may get complicated.
Financing a car with no credit or bad credit
Buying a new or used car can be expensive, especially if the financing terms are unaffordable. If you are in financial difficulty and need a new car, there is hope. Lenders such as RightRide offer solutions for customers with poor credit scores who are denied auto loans by banks and lenders.
NightRide offers low, flexible interest rates and has one of the largest selections of cars available for purchase nationwide.
Is it a good idea to get a car loan?
Before you start looking for car financing options, you need to determine if they are affordable and fit your monthly budget. Knowing how much you can afford will help you make the right car choices.
Ideally, if you can meet all your expenses with your income and save, you can afford a car loan. Having savings will allow you to have an emergency fund to cover car repairs and maintenance costs.
If you are financially comfortable making monthly payments, then buy your new car!
