How to Get a Car Loan in Canada: Your Financing Pathways

Financing a vehicle can be a daunting and complicated matter, typically because the majority of individuals do not have enough money to buy a car or to pay it off in full.

For most Canadians, this means that getting a car loan by borrowing the money from a financial institution like a bank, or from another type of lender, is required in order to finance the purchase.

Although one may consider leasing a vehicle, this article will specifically touch upon how to go about financing a vehicle through a car loan.

What Are the Defining Attributes of a Car Loan?

A car loan is essentially when one borrows the full amount of the purchase price of a vehicle and pays it back over a specified period. In Canada, the longest car loan length that you can get is a 96-month contract term, which is eight years for full repayment. Generally, longer the contract term, less monthly payments will be, however, the interest rate is higher.  

One of the major drawbacks of using a long-term financing contract is that you end up feeling tied down by those monthly payments. The main advantage is that you can pay off that vehicle quicker if you choose to do so by making extra payments when possible.

The caveat with paying down the loan quicker is that you have to have agreeable terms for this as some loans from dealerships or private lenders do not allow extra lump sum payments. So make sure to be very aware of loan fine print when going through the approval process.

What Are the Two Ways to Get a Car Loan?

Strictly speaking, the majority of Canadians will look to finance the purchase of their vehicle through a car dealership, either through a financial institution or through an independent finance company that specializes in car loans. Each of these options has their advantages and drawbacks, but typically, the health of one’s credit is what determines which approval path to take.

Although there are other types of lenders available (private ones) that can help you finance the purchase of a new or used vehicle, they tend to be less trustworthy and are not well known as mainstream options. With this said, here are the two ways that you can get a car loan:

1. Finance through a dealership

This is as simple as walking into the dealership, shopping around for a car, doing a test-drive, and then signing the documents. The financing department will do a credit check to ensure that your credit is “good enough” for a loan and if it is, you just sign the papers.

2. Obtain a line of credit or get a loan from your financial institution.

This is where you obtain an arranged loan directly from your banking institution rather than from a third-party lender. A major benefit of going this route is that if you have a strong relationship with your banking institution, you are far more likely to negotiate a better interest rate than with a dealership.

Car Loan Routes: What are the Advantages and Disadvantages?

If you choose to finance through a dealership, you will enjoy in-house convenience as the application process is less time consuming and allows you to buy the vehicle right away. 

Dealerships are also businesses, so they are more likely to be open to negotiating terms and throwing in extras to make the sale. In addition, they are more inclined to sell a used car to an individual that has bad credit as moving old inventory is necessary for dealerships. If you choose to finance through a banking institution, you will enjoy knowledgeable financial advice, the payment process may be more lenient on missed payments, and your bank will more than likely be open to negotiating the terms of the payment period.

Concerning the disadvantages, car dealerships generally do not allow deviation from the payment plan, which means less tolerance for any missed payments and no payment acceleration options. You may also end up paying more for your vehicle in the end as you will need to put a down payment, possibly pay a higher interest rate, and still make monthly payments.

On the other hand, financial institutions are cautious about the depreciation value on new cars so you may not get financing for a new vehicle; they have stricter rules during the lending process, so they may not be open to changing up interest rates, and the entire loan process will take longer.


What Does The Loan Process Look Like?

It will require you to take several steps to learning about your affordability, available credit, and pre-approval options. Here is a quick breakdown of how it looks:

1. Check your credit score and review it for any unusual activity. Make sure to dispute any errors that may be incorrect in balances or late payments. The better credit score you have, more money you can borrow for a lower interest rate.

2. Know what your budget. Never go ahead with getting a vehicle without knowing that you can afford that monthly payment. Always create a budget that includes the car loan payment and extra costs like vehicle registration, auto insurance, and repairs.

3 Determine how much you can actually afford. Figure out what is a reasonable monthly payment based on your income.

4. Get pre-approved documents before shopping. Look for the best terms and conditions.

5. Head out and go shopping for your new vehicle!

When considering a car loan, always make sure to do a research. In the end, you want to go with the route that is going to give you the best success for a loan repayment schedule that fits you and your finances, rather than the route that is going to give you the most likely chance of loan approval.