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How Do Car Loans Work? The Ultimate Guide For 2024

Whether you’re buying a new or used car over $5,000.00, odds are you’re going to be taking out a loan. But if this is your first time buying a car or making a purchase of any kind this substantial, you might not be aware of how large loans work. So, we’re going to explain how car loans work in Ontario to give you a better idea of what to expect!

What is a Car Loan and how is it Paid?

Simply put, a car loan is a way to own a car without needing to pay the full price up front. We use loans because most Canadians don’t have enough money laying around to fully pay for a car in cash. You’ll typically get a car loan from the dealership you’re buying the car from, or you’ll get one from the bank.  Once you receive the loan, you’ll be paying it off over a set amount of time. This amount of time is up to your discretion and is dependent upon factors such as your budget and how quickly you’d like to pay off the loan.

There are 3 main factors when it comes to the total amount you’ll be paying on your car loan; the loan amount, the length of the loan, and the APR (annual percentage rate), otherwise known as interest. We’ll go over these 3 factors one by one.

Car loans are generally paid in monthly increments directly from your bank account, but sometimes these payments are made on a weekly or bi-weekly basis. There are many helpful resources you can use to figure out how much you’ll be paying per month on a car loan such as Scotiabank or CIBC.

3 Main Factors of Car Loans

1. The Loan Amount (Principle)

This is the total cost of the car including add-ons and other fees, minus your down payment amount. A Down payment is the amount of money you pay upfront. Technically you don’t need to put any money down on a car, but it’s highly recommended you put down roughly 20% of the vehicle’s total cost. This way you’ll be borrowing a smaller loan amount and will have lower loan payments each pay period.

How it works: You put a 20% down payment on a car that costs a total of $40,000. 20% of $40,000 is $8,000. So, you’ll be paying $8,000 up front for the vehicle and will be taking a loan for the remaining $32,000 which you’ll be paying off over time.


  1. APR (Annual percentage rate)

This is your interest, an additional cost you’ll have to pay on a car loan. Interest rates are added on by borrowers because they need to make money on your loan. The average annual interest rate on a car loan Canada is around 4% for new cars and 8% for used. The interest rate on a car loan varies based on several factors which are listed below. Remember to shop around for car loans because the interest rate can vary from lender-to-lender and you might be able to find a better deal or an incentive. At Car Nation Canada we always offer great rates and are happy to work with you no matter what your financial situation is.

Main Factors that Influence Interest Rate

Your Credit Score: This is usually the most important factor when it comes to your interest rate options. Your credit score allows the lender to gauge your ability to make payments. If your credit score is low (300-600), you’ll generally be offered higher interest rates because the lender sees you as higher risk of not paying back the loan or making late payments. On the other hand, if you have good credit score (700+) a lender will be much more inclined to offer you lower interest rate because you’ll very likely make the payments.

Credit Karma Interest Rate per Credit Score

Loan Length: Lenders will usually charge higher interest rates the longer the loan term. This is because they see longer loan terms as higher risk as they are unable to predict future economic predictions and the borrower’s ability to pay back the loan in the long term. Shorter loans carry much less risk for the lender and therefore will offer lower interest rates.

Tresl Auto Finance Interest Rate Loan Term

Your Down Payment Amount: Lenders will charge higher interest rates to those who put little or no money down when they purchase the car. This is because of fear that the borrower (you) will be more likely to default on the loan, meaning you cannot afford to pay. Higher down payments mean a lesser amount borrowed and lower payments which are much easier to handle.

New or Used: On average, new cars tend to have lower interest rates than used cars. This is simply because the lender sees the used car as a riskier purchase due it its age, milage, condition, etc.

There are many other factors that influence interest rate such as inflation, but the factors we’ve listed are ones you can have impact over. To have the lowest possible interest rate it’s our suggestion that you work on improve your credit score, seek the lowest loan term possible, and put as much money down as you can.


  1. The Loan Term

You’re able to choose how long you can pay off a car loan for in Ontario. In 2022, the average term length for a car loan is 72 months (6 years). However, people are choosing to take longer car loans these days and you’ll be able to have a loan term as long as 120 months (10 years). The length of the car loan you choose depends on how high you’d like your payments to be. A shorter loan will have higher payments because there is a lesser number of total payments, and conversely, longer payments will have smaller pay amounts, and due to interest, you’ll be paying less overall.

Here's how it works: Without factoring in interest, let’s say you want to pay off the $32,000 loan over 72 months. You would simply divide $32,000 by 72 which gives you 444.44. Which means you would be paying off your car loan at $444.44 plus APR per month.



There are many situations where you might want to change parts of your loan agreement. If you’d like to start paying off the loan faster, you’re allowed to make payments above the minimum agreed upon amount. In fact, it’s a great idea to pay off your loan as soon as possible and if you’re in a position where you can start making larger payments, we recommend you do so! On the other hand, if you’re struggling financially to meet your payments, it may be a good idea to contact your lender and extend the loan, or get out of it completely.

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Car Loan Refinancing

FiveCentNickel Car Loan Refinancing

Source: fivecentnickel.com

Car Loan refinancing is another important part of how car loans work in Ontario. Car loan refinancing means to replace your current loan with a new one. That could be to get a better interest rate, release some equity, shorten the loan term, lower the monthly payments, or something else entirely.

Refinancing a car loan in Ontario works in much the same way as your original application. Rather than assessing the value of the car to come up with a figure, you just need the settlement figure of the current loan (how much you still must pay). Refinancing may be a great option for you if the time is right. Please contact us if you’re interested in refinancing your car loan. Refinancing would be a great idea for you if you have a bad credit car loan. Usually if you’ve been paying off a car loan for 2 years or so without missing payments, your credit score will be much higher, so it would be a good idea to refinance the loan to try and get a lower rate!


Benefits of car loan Refinancing

Lower interest rate: If your current auto loan rate is high or you used a bad credit car loan, you could pay much less when you refinance. If you can qualify for a lower rate, you could make significant savings on interest payments.

Lower monthly payments: If you have paid off some of your existing loan, you can refinance it to a lower amount, which will lower your monthly payments.

Shorter loan term: If you’re a way into your loan and can afford the monthly payments, you could refinance to shorten the overall loan term. Less common than lowering the payments but still possible.

Release some equity: If you have paid off some of the auto loan and the car is worth more than the outstanding amount, you can refinance to the value of the car to release some cash.


That’s it!

This is how car loans work in Ontario. We hope this cleared some things up for you. It’s great to be prepared and know exactly what you want budget-wise when you enter the dealership. When your ready to finance your next new or used car at a great rate, give us a call at +1 888-856-1288 or fill in the form below!


Related Resources

Bad Credit Car Loans

Zero Down Payment Car Loans


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