Financing a car, or a car loan, is where you borrow an amount of money from a lender, and agree to pay it back in monthly payments in a set period. This period (otherwise known as a term) can vary between 2 and 5 years, maybe longer.
When you’ve found a car you want to buy, you’ll know how much to borrow. You may have to make a down payment, which is a good idea as this minimizes the amount you need to borrow. A key advantage is that you get the money upfront but can spread the cost of the car over time.
As it is a loan, the lender will charge interest, so the amount you repay will be more than the amount borrowed. The interest rate will likely be fixed (i.e. it won’t change) and will depend on your credit score and your application to borrow.
Note that loans will display a “representative APR”. This means that a percentage of approved customers will be offered this rate. If you were to apply, there is no guarantee you would get this rate, and may be offered a more expensive rate instead.
If you’re approved for a loan, the money is deposited into your bank account, so you can transfer it to the dealer. Or the money may be transferred to the dealer directly. You would then be able to drive the car away as its new owner.
Advantages and disadvantages of financing
| Advantages | Disadvantages |
|---|---|
| – Your payments build ownership in the car. Once fully paid off, the car is yours – No limits on kilometers driven – No charges on wear and tear – There is no charge to sell or trade in the car during the term – The trade in value can lower the cost of a new car – You can modify the car as you wish – Moving to a different province isn’t as problematic like a lease – The car becomes an asset, adding to net worth | – The down payment is usually higher than that needed on a lease – A credit check will be required; an application for borrowing will be on your credit report. Not necessarily a con, but be aware of your credit score before applying – Monthly payments can be higher – The value of the car depreciates – Maintenance and repair costs increase – You may owe more than the car is worth. This is known as negative equity. |
Where to find financing
Usually the dealer can help secure finance through the dealership or their own network of finance providers. You can also shop around for loan quotes online which may be cheaper or more competitive than that offered through the dealer.
Always check the terms of the quote and understand if you can afford to make the monthly payment. A credit check is also required, so knowing your credit score beforehand will give you an idea of whether you’ll be approved.
FAQs
What impacts my loan amount and monthly payment?
The amount you can borrow will vary between lenders. They will consider many aspects of your application including your income and credit history to determine if to lend to you, and how much.
A longer term means lower monthly payments, but you'll likely pay more in interest over the term.
How can I make my monthly payment as low as possible?
Find a loan with the lowest interest rate possible.
You can borrow less, which means making a larger down payment. Or choose a longer term. But you'll likely pay more in interest over the term.
The alternative is to select a cheaper car. This would result in less borrowing and smaller payments.
Can I pay the loan back early?
Yes! Depending on your lender, you may have to pay a fee. Or you may be able to do it without a charge. If you can afford to settle your loan early, call your lender to talk about settlement options to clear the loan.
What if I miss a payment?
Your lender will contact you if you miss a payment to understand why. If you miss regular payments, you'll get a "in default" mark on your credit file. This may impact future applications for credit.
If you continue missing payments, your lender could take you to court. This may result in repossessing the car, or other assets you own to the value of the car.
If you're not able to make payments, call your lender before the next payment is due. You can discuss and agree to a different payment plan that is more affordable to you.
How quick can I get the money?
It depends on the lender. If you made an online application, you could have the money within a day or two. If the application was made through the dealer, the money could be sent directly to the dealer and you could drive the car the same day.
Applications and documents in the post could take up to a week.
Essential information
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