How Do Car Loans Work in Canada? A Definitive Guide in 2024

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Written by Enoch Omololu

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If you are in the market for a new or used vehicle in Canada, a car loan might be just what you need. As of 2023, the average new car in Canada cost just over $66,000, and the average price of a used car is about $39,000. 

Most people are not going to have this sum saved to pay for the car outright in cash. Before signing on with the dealership to finance the vehicle at a high-interest rate, consider taking a look at a car loan. They can allow you to pay for the car in full while paying the loan back on your own schedule at a lower interest rate. 

This article will discuss everything you need to know about car loans in Canada in 2024.

What is a Car Loan?

A car loan is a loan that you can borrow from a financial institution for the purchase of a new or used vehicle. The institution you borrow from can be a bank, a credit union, or even the car dealership itself. 

As their name suggests, a car loan can only be used to purchase a vehicle. They are also referred to as auto loans and are quite different from personal loans or leasing a vehicle. 

How Do Car Loans Work?

As we mentioned, car loans are quite different from personal loans. First of all, car loans can only be used to buy a car or other vehicle. A personal loan can be used for any reason as long as the loan amount is paid back with interest. 

Personal loans are also usually unsecured, meaning there is nothing to back the loan. With an auto loan, the collateral will always be the vehicle that it was purchased with. If you fail to pay back your car loan in a timely manner, the lender can repossess your vehicle. 

Car loans also tend to have lower interest rates than personal loans and are easier to get approved for. The amount of the car loan and the interest rate is usually contingent on the value of the vehicle and your credit score. Since the car loan has the vehicle as collateral, those with poor credit histories have a higher chance of qualifying. 

How to Get a Car Loan in Canada?

The process for getting a car loan is quite simple in Canada. Most financial institutions offer online applications directly on their websites. Here are a few different sites for car loans in Canada:

Royal Bank of Canada Car LoanRBC My Auto Affordability Tool
Toronto Dominion Bank Car LoanCar Loans & Flexible Financing Options | TD Canada Trust 
CIBC Car LoanGet a No Down Payment Car Loan For New or Used Vehicles | CIBC  
Bank of Montreal Car LoanCar Loans: Financing Options for your Vehicle – BMO Canada 
Scotia Bank Auto LoanAuto Financing – Car Loans in Canada | Scotiabank Canada 
National Bank Car LoanCar Loans, Apply Online! | National Bank 

As for eligibility in Canada, here are the minimum requirements to get approved for a car loan:

  • You must have a driver’s license valid in Canada
  • You must be the age of majority (18 or 19) in the Province you reside in
  • You must show that you can pay the loan back with an income statement
  • You must have a decent credit score, usually above 660

Each lender will require different information for the application. In general, car loans in Canada are more lenient on applicants than other loans because the vehicle acts as collateral. 

Car Loan Rates in Canada

Like most interest rates on debt in Canada, car loan rates have been directly impacted by the rapid rise of the Bank of Canada’s overnight interest rate in 2023. But the central bank’s key interest rate is not the only thing that can impact your car loan in Canada. 

Other factors that have an impact on the car loan rate you receive include:

  • Credit score
  • The term of your loan
  • Your income 
  • The likelihood you will be able to pay off the loan
  • Type and price of the car

In general, a higher credit score will lead to a lower interest rate for your car loan. For Canadians with good or great credit, auto loan rates have historically been in the range of about 4.0% to 8.0%. If you have a poor credit history, there is a high likelihood your interest rate will hit the double-digits, or you may not even qualify for the loan at all.

Credit RatingCredit Score Car Loan Interest Rate
Very Good725 – 7596.0%
Good660 – 7247.0% to 8.0%
Fair560 – 65910.0%
Poor300 – 55915.0% or more

Note, dealerships or lenders can provide different interest rates from this chart. These are meant to be a guide from historical auto loan rates in Canada. 

Like houses, you can select from a fixed or variable auto loan interest rate. Variable rates will be more impacted by rate hikes but are usually offered at a lower initial rate than fixed-rate auto loans. 

How Does Car Loan Interest Work?

Car loan interest works the same as with any other loan or debt in Canada. It is the cost of borrowing a sum of money from a lender. 

There are two types of interest loans you can take for a car loan in Canada: simple interest and precomputed interest. Simple interest loans calculate the amount of interest left on the outstanding principal from the day you make your payment. 

Precomputed interest is when the interest you owe for the term of the loan is precalculated. The total amount of interest is added to the principal, and that is divided into monthly payments. This means it is more difficult to pay off a pre-computed auto loan early as you are paying the full amount of interest.


What is a good interest rate on a car loan in Canada?

Generally, an interest rate of between 4.0% and 7.0% is considered a good range in Canada for car loans. Note that current interest rates in 2024 are higher than in recent years. According to Statistics Canada, the average car loan rate is about 7.65%. 

How long is a car loan in Canada?

Car loans can vary in Canada but usually range between 36 and 84 months. As with most loans, if you choose a shorter term, your payments will be higher, but you will pay less interest over the long run. 

Is a 5-year car loan worth it?

The difference between each car loan term is that you will end up paying more in interest for a longer term. For example, a 60-month or 5-year car loan will pay less interest than a 72-month or 84-month loan but will have higher monthly payments. 

Can a non-resident get a car loan in Canada?

Yes, non-residents are able to secure a car loan in Canada. Many financial institutions have plans in place to help new residents of Canada, even if they have no credit history. There might be some stipulations, including a minimum downpayment to qualify for the car loan.

What credit score do you need to buy a car in Canada?

It all depends on what interest rates you are willing to pay. Usually, you will want a Fair to Good credit score of about 600 or higher. You can still buy a car if your credit score is lower, but the interest rate for your auto loan will be high. 


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Enoch Omololu

Enoch Omololu is a personal finance expert. He has a master’s degree in Finance and Investment Management from the University of Aberdeen Business School (Scotland) and has completed several courses and certificates in finance, including the Canadian Securities Course. Enoch is passionate about helping others win with their finances and has written about money matters for over a decade. He has been featured or quoted in The Globe and Mail, CBC News, Yahoo Finance, GO Banking Rates, Financial Post, Bankrate, Forbes, Toronto Star, CTV News, and other personal finance publications. He founded Savvy New Canadians, one of Canada’s top financial education platforms.

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