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Car Loans in Canada

Financing a vehicle is one of the largest borrowing decisions most Canadians make outside of a mortgage. Understanding how car loans work, the true cost of different terms, and the tradeoffs between dealer and bank financing can save you thousands of dollars. In Canada, car loans are typically simple-interest loans (not compound interest like mortgages), meaning interest is calculated on the outstanding balance each month. This is straightforward, but the total cost can still be surprising, especially on longer terms.

New vehicle interest rates for borrowers with good credit currently range from approximately 4% to 7%, depending on the lender and term length. Manufacturer-subsidized promotional rates of 0% to 2.99% are common on select models, though these often come with conditions: you may need to forgo a cash rebate, or the lower rate may only apply to specific trim levels or shorter terms. Used vehicle rates are typically 1-3 percentage points higher than new vehicle rates, reflecting the greater risk to lenders. Borrowers with lower credit scores may face rates of 10% or higher through subprime lenders.

The choice of loan term has an enormous impact on total cost. A $30,000 loan at 6% over 48 months costs approximately $3,800 in total interest with a monthly payment of $704. The same loan stretched to 84 months drops the payment to $438 but increases total interest to approximately $6,800 — nearly 80% more. Longer terms also increase the risk of negative equity, where you owe more than the vehicle is worth. A new car typically loses 20-30% of its value in the first year and 50-60% over five years, so a 7-year loan almost guarantees several years of being underwater.

When comparing dealer financing with bank or credit union loans, always start by getting pre-approved at your own financial institution. This establishes a baseline rate and gives you negotiating power at the dealership. Dealers act as intermediaries between you and their lending partners, and they may mark up the rate by 1-2% as additional profit. Having a competing offer in hand forces transparency. Consider the total cost of ownership beyond the loan itself: insurance, fuel, maintenance, and depreciation all contribute to the true cost of driving, and should factor into your decision between buying new, buying used, or leasing.