Are you trying to navigate through the confusing process of buying a car? If you are, you’re not alone! Everyone is daunted by the process at first. The good news is, we provide all the answers to help your car-buying journey go much smoother.

You may be wondering about the particulars of how a car loan in Canada works. It helps to understand the mechanics (pun intended!) of auto loans before you apply because you can increase your odds of approval.

Canada Drives answers these “mechanical” questions below.

How do I get a car loan?

The process of getting a car loan is quite simple, the hard part is getting approved! When you go through a dealership, your dealer will help you fill out your application and submit the application on your behalf. If you go through a private seller, you usually have to do more of the legwork and apply to the bank yourself. There are three simple steps: 

  • Step 1: Complete the lender’s car loan application. Provide all necessary personal and financial information as required by the lender.
  • Step 2: Submit other required documentation the lender needs. For example, you may need to submit notices of assessments, income and expense documentation, other debt obligation supporting documents, and the make and model of the vehicle you want.
  • Step 3: Wait to be approved by the lender. This can take a couple of days or a couple weeks depending on the lender.

Is it better to get a car loan from a bank or dealership?

Besides banks and dealerships, there is a third option that is starting to emerge in online service providers. That means there are three ways to apply for an auto loan in Canada:

  1. Bank: Toronto-Dominion Bank, BMO, RBC, CIBC, and Scotiabank offer car loans among other financial institutions. These are great places to get approved for an auto loan if you have good or great credit. Banks can be frustrating to work with because of multiple in-person appointments, lots of paperwork, and they typically only cater to customers with higher credit scores.
  2. Dealerships: When you are vehicle shopping at dealerships they will quite often give finance options at the point of sale. These options will be on the specific vehicle you have selected. Dealerships are more convenient because you can get the car and the financing in one place. However, most dealerships focus on their “prime” business and don’t have the resources to help bad credit and no credit applicants.
  3. Online service providers: Online providers like Canada Drives are starting to emerge with more flexibility to help customers facing all types of credit situations to connect them with lenders and dealerships that know how to help. With Canada Drives, the application can be completed online from the comfort of your home. There are no in-person appointments until we find a car in your area that you love.

How does interest on a car loan work?

The interest rate the lender charges depends on the lender’s set prime rate, the borrower’s credit score and the vehicle attached to the loan. Every payment you make is composed of part interest and part principal. Your payment stays the same, but the interest and principal payment breakdown differs every month. Usually interest is larger at the beginning of the loan and gets smaller and smaller as the loan’s term goes onward.

How do you calculate car loan payments?

You can calculate auto loan payments using Canada Drives Car Loan Calculator. To use the calculator, you’ll need to know your credit score, the car loan amount and the duration of the loan.

What are the requirements for car loans in Canada?

Every lender varies slightly in their loan requirements. Below are some basic loan requirements you can expect from virtually every lender:

  • Government issued identification
  • Proof of residency
  • Proof of income
  • Proof of car insurance
  • Be the age of majority in your province or territory
  • Consent to a credit rating check

How do you pay off a car loan?

Car loans have set repayment schedules and your payments will be due on a specific date. Payments are usually due every month, but every lender varies. To preserve your credit score, you should always make payments on time and in full. Afterall, your payment history has the biggest impact on your credit score.

Most lenders prefer to set up pre-authorized payments that come directly out of your bank account when the payment is due. If you wish, you can make a higher payment than what’s due. Higher payments will reduce the term of your car loan and serve as premature interest payments.

What kind of credit score do you need to buy a car?

As a general benchmark, a credit score of at least 650 is required to get approved for an auto loan with ease, but it depends entirely on the lender’s preferences. There’s no set minimum credit score requirement for car loans that’s widely known and accepted. Some lenders consider your credit report and credit score during the approval process but also look at other factors such as income.

Learn how to check your FREE credit score here.

Can I get a car loan with bad credit?

It’s absolutely possible to get a car loan with bad credit. It will help to have some bargaining chips to negotiate a better deal with lenders. Below are three things you can do to increase your odds of approval with bad credit. 

  • Find a cosigner with good credit
  • Raise your credit score before you apply
  • Save for a down payment

Can I get a car loan after bankruptcy or consumer proposal?

Getting a car loan after bankruptcy or a consumer proposal can be challenging, but it is possible! When shopping, be sure that you’re realistic in what you can buy and set reasonable expectations. Also, you can follow the steps below to increase your odds of approval.

  • Budget realistically to avoid financial trouble again
  • Get pre-approved with a service provider that knows how to help
  • Find a cosigner with good credit
  • Offer a larger down payment

How to get a student car loan with no credit?

Getting approved for a loan with no credit is similar to having bad credit: it’s a challenge!

It’s difficult because the lender isn’t able to measure your creditworthiness. Fortunately, if you have a source of income, it’s possible to get a student car loan with no credit. You just need to prepare accordingly. Below are some tips to help you get approved.

  • Build credit before you apply
  • Prepare up-to-date income statements 
  • Make a bigger down payment
  • Find a cosigner with good credit

How does a car loan impact your credit score?

If you manage a car loan responsibly by making payments on time and in full, a car loan can positively impact your credit score. On the other hand, if you frequently miss payments or make partial payments, your credit score will be impacted negatively.

Payment history has the biggest impact on your credit score, and the diversity of your credit products is also taken into account. What does that mean? Having a car loan, among other types of credit, will positively influence your credit score as long as you don’t miss a payment.

As mentioned, a car loan will only hurt your credit score if you manage it irresponsibly. The only other way a car loan could negatively impact your credit score is through credit checks. Everytime a lender pulls your credit report, your credit score takes a slight hit. For this reason, you should be very selective about what credit you apply for. 

However, the credit bureaus do allow a 30-day grace period for rate shopping. This means, when you’re applying for, say, a car loan, you can apply to multiple lenders within a 30-day period to see who offers the best interest rates. All of your applications will only count for one credit pull. Great news for bargain hunter! 

Can I afford a car loan?

As you’re probably aware, cars are expensive, but if you make the right moves, it can be affordable even for budget-minded people. When trying to decide if you can afford a car loan, on top of the monthly payment, you should consider: 

  • Gas
  • Insurance
  • Maintenance and repairs
  • Admin fees & tax
  • Parking fees

Can you get a car loan on EI, social security or disability?

Affording the car loan payment is definitely possible while on employment insurance (EI), social security or disability. There are service providers, like Canada Drives, that can work with low-income households and individuals. 

When applying for car loans on low income, the lender will want to see your proof of income from EI, social security or disability. Be prepared to prove your income when applying. 

Are car loan sales promotions legitimate?

When doing research for auto loans, you may come across deals that are so good it’s hard to know whether they’re real or not. 

With regards to guaranteed approval, if it seems too good to be true, it probably is! For example, any car loan offer that advertises “no credit check with guaranteed approval” should be avoided like the plague. Lenders flogging this promotion will probably charge exorbitant interest rates or extort customers some other way. 

The other three car loan promotions are legitimate, but 0% financing is normally reserved for good credit customers and often comes with hidden catches. 

However, zero down payment options are available. With no money down, your monthly payments may be higher, but it’s a great way to obtain a new car when you don’t have savings. 

Finally, cash back car loans are a handy way of getting a lend of cash in hand on top of your auto loan without having to apply for another loan separately. 

What is a pre-approved car loan?

Pre-approved car loans are exactly what they sound like. Before you actually shop for a car, you work with a lender who’ll evaluate your finances and estimate how much you can get approved for a car loan. Pre-approved car loans are only good for a short period of time. Getting pre-approved can help you budget and gain more bargaining power when shopping for cars. 

Ending a car loan

Don’t want your car anymore? It’s possible to terminate a car loan prematurely. Let’s explore the process of ending a car loan below. 

How to get out of my car loan?

You can get out of a car loan by selling your car and using the proceeds to pay off the loan’s balance. Keep in mind that if your car isn’t worth enough to cover the cost of the outstanding loan balance, you have negative equity and will have to pay the difference to end the loan. This is what’s called being upside down on your car loan. Below is a step-by-step guide to getting out of a car loan. 

  • Step 1: Figure out your car’s current market value.
  • Step 2: Advertise your car for sale on sites like Craigslist, Kijiji, or Facebook Marketplace.
  • Step 3: If the proceeds of the sale don’t cover the outstanding loan balance, come up with the rest of the money another way.
  • Step 4: Use the proceeds to pay off your loan.

Are there penalties for paying off car loan early?

Some car loans have prepayment penalties when you pay off the loan early. Lenders typically charge this penalty because they want to recover some of the interest they lose as a result of the ended loan. Read the conditions of your loan to determine if a prepayment penalty will apply to you and how much it is before paying off the loan. 

Does paying a car loan early help your credit score?

When you pay off your car loan early, you close one of the accounts on your credit report. This can cause a dip in your credit score because you’ve lost a product in your credit mix and consistent monthly payments have stopped. If you make payments on time and in full, and your auto loan is one of the only accounts on your credit report, you might want to consider keeping it open. And we doubly recommend keeping the account open if it is one of the oldest accounts on your credit report.

On the other hand, you lower your debt-to-income ratio, and that can only be a good for your credit score in the long run.

Can you transfer your car loan to someone else?

You can transfer the car loan to another party, such as a family member or friend. If you find someone to take over your loan, you can work with the lender to draw up a new car loan contract. Remember that the person obtaining the car loan will have to meet all of the lender’s requirements.

Keep in mind that not all lenders will be okay with transferring a car loan, particularly banks and credit unions. Traditional lending institutions tend to have stricter policies related to transferring car loans. Also, transferring a car with negative equity can be challenging or not possible. It's worth asking your lender before going through the trouble of finding someone to take over your loan.

Can I sell a car before I’ve paid off the loan?

Technically speaking, yes you can sell a car with a loan attached to it. However, if you default on the loan, the lender has the right to repossess the car to cover the outstanding loan balance. If there is no car to repossess, then there will be severe consequences. If you use the car sale proceeds to repay the loan, you won’t have anything to worry about.

Renegotiating your car loan

After having your car for a while, it’s possible to renegotiate the terms to get a more favourable bargain. It’s ideal to wait at least a year before renegotiating, but it’s possible to renegotiate sooner too.

Can I refinance a car loan?

Yes, you can refinance any car loan after some time has passed. Refinancing is also a great alternative if you can’t get out of your car loan entirely. You can refinance a car loan after a year. As a general rule, waiting at least 90 days is the bare minimum of time that has to pass before refinancing.

Can you refinance a car loan with negative equity?

Most lenders don’t want to refinance cars with negative equity because it’s too great of a risk to them. Work on moving your equity into the positives before refinancing.

Can I extend my car loan?

The longer the car loan’s term, the lower your car loan payments will be. If money has become tight recently, you may want to increase your car loan’s term. When refinancing, you can extend the loan’s term to reduce the loan payment amount.

However, if you extend your car loan, you’ll be paying interest for longer and you’ll likely owe more for the car than it’s worth during the final months of the term.

Get pre-approved for a new car loan today!

Canada Drives has been pre-approving Canadians all across the nation since 2010. Whatever your credit rating, we work with car buyers facing all types of credit situations to help secure affordable vehicle financing.

With finance already approved before you visit the dealership, your car-shopping experience will be a lot more enjoyable. There’s no more waiting, no more anxiety, and no more disappointment.

Once you fill out our fast, free, and secure online form, we'll match you with a certified dealership that has the right car for your budget.

Apply with Canada Drives to learn more and see what you're eligible for.

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