A Guide to Auto Loans: How Does Car Financing Work in Canada?

Buying a car is a significant investment that requires careful consideration of financing options. In Canada, loans are a popular way to finance new and used cars. 

If you’re looking to purchase a car and wondering how car financing works, this comprehensive guide will provide all the information you need:

Understanding Auto Loans

An auto loan is a type of loan that you acquire to purchase a car. This type of loan is repaid over a set period, usually ranging from 12 to 84 months, with interest. Auto loans can be classified into two categories: secured and unsecured loans.

Secured loans require collateral, which is usually the car you are buying. The lender has a right to repossess the vehicle if you default on the loan. Secured loans have much lower interest rates than unsecured loans.

Unsecured loans, in contrast, don’t require collateral, but they do have higher interest rates. They are usually given to people with good credit scores.

Car Financing Options

When it comes to car financing in Canada, you have three options: dealership financing, bank financing, and private financing.

Dealership financing is the most popular option. This is where you get financing through the dealership where you are purchasing your car. The dealership will work with different lenders to find a loan that works for you. Dealership financing is convenient, and you can get approved quickly. However, it can be more expensive compared to other financing options.

Bank financing involves getting a loan from a bank or other financial institution. Banks offer competitive interest rates, and you can negotiate the loan terms. However, the loan application process can be time-consuming, and the approval process can take several days.

Private financing involves getting financing from a private lender. This type of financing is suitable for people with a poor credit score. Private lenders usually charge higher interest rates, and the loan terms may not be as flexible as bank financing.

Factors That Determine Car Loan Approval

When applying for a car loan, all lenders will consider several factors before approving your loan. These factors include:

  • Credit Score: This is one of the most crucial factors lenders consider when approving your loan. A good credit score boosts your chances of getting approved for a loan and getting better interest rates.
  • Income: Lenders will also consider your income to know if you can really afford to repay the loan. They will look at your debt-to-income ratio to see if you have enough income to cover your monthly loan payments.
  • Down Payment: A down payment is the amount you pay upfront when purchasing a car. Lenders will look at your down payment to determine the loan amount and interest rates. A bigger down payment will reduce your monthly payments and interest rates.
  • Loan Term: This is the length of time you have to repay the loan. Lenders will consider the loan term when determining your interest rates. A longer loan term often results in lower monthly payments but higher interest rates.


Car financing is a popular way to purchase a car in Canada. Auto loans come in secured and unsecured options, and you have three options for financing: dealership financing, bank financing, and private financing. When you’re applying for an auto loan, lenders will consider your credit score, income, down payment, and loan term before approving your loan. With this comprehensive guide, you’re now equipped with all the information you need to make an informed decision when it comes to car financing in Canada.

Our auto loans at 365 Loans Canada are here if you need help purchasing a vehicle. With our easy application process and speedy approval, you can get the car you need in no time. Contact us now to learn more about our quick and straightforward auto loans

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