Car Financing In Ontario: Your Guide To Car Loans

Learn about car financing in Ontario. Shopping for a car? Keep reading for everything you need to know about getting a car financed in Ontario, Canada.

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Car Financing In Ontario: Everything You Need To Know

Sean C. Resident Copy Writer/Executive Editor

Buying a car is likely one of the biggest investments you’ll ever make. Most people don’t have the spare capital to buy a car outright, which is why car financing exists.

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There are a ton of different types of payment plans out there, and they all come with their own pros and cons – if you’re uneducated on the subject, it can all get pretty confusing.

Today we’re going to look at a few popular car loan payment plans to find the best option for you.

Types of Auto Loans

Most dealerships offer different types of car loans for people who don’t want to (or can’t) pay the full amount right away. Generally speaking, there are two main types of commonly offered car loans in Ontario: leasing and financing

  • Leasing: Leasing a car often means the company you’re leasing a vehicle from is only lending you the vehicle for the duration of the lease. Once the lease is over, you can then choose to either purchase the vehicle or lease a new one.
  • Financing: Financing a vehicle means you’re basically taking out a loan to pay for the full value of the entire vehicle. You will then pay off the entire car loan over a period of time with a rate of interest.

Leasing a Car in Ontario

Leasing a car in Ontario can typically be done by signing a contract with either a dealership or leasing company. This contract will allow you to use the specific vehicle for the entire duration of the lease. In return, you will have to pay the dealership or company a set monthly payment. At the end of the lease, you can either buy the car or return it to get a new lease.

Despite the vehicle being in your possession, you are not technically the owner. This is why leasing a vehicle often comes with lots of restrictions. Breaking any of these restrictions (like going over the annual mileage limit) will lead to you being charged with penalty fees. However, you will still be responsible for the vehicle’s maintenance and insurance costs. 

Financing a Car in Ontario

On the other hand, getting a vehicle financed means that you are basically asking someone else to buy the vehicle for you. You will then have to pay the bank, dealership, or credit union the entire amount spent plus interest over a predetermined amount of time. The terms of this car loan will be negotiated by both parties.

Unlike when leasing a car, getting a car financed will leave you with full ownership of the vehicle from day one. You won’t have any restrictions regarding the usage and customization of the vehicle.

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What are Bad Credit Car Loans?

Every Ontario citizen will have a credit score – which is a numerical expression based on an analysis of how financially trustworthy you are. People who show that they can be trusted with credit (by having money saved up and paying dues on time) will have a higher credit score. Companies that offer vehicle loans will typically base their loaning decision off of your credit history.

Unfortunately, this means that people who have had financial difficulties in the past might have a harder time getting a car loan. Having a bad credit score will tell these institutions that you’re a risky borrower and may fail at making your payments.

To help people with bad credit, some Ontario companies offer bad credit car loans or “subprime loans” to those desperately in need of a car. These types of car loans tend to have either tighter restrictions or higher interest rates to give them some cushioning in case you fail to make your payments.    

Is it Better to Lease, Finance, or Buy?

The three options presented each have their own pros and cons. What’s important to understand is that everyone has a unique financial situation and will have a payment scheme that will suit them best. Make sure that you choose the option that’s most in-line with your current financial status.

In the long run, directly buying a car will save you more money since you won’t need to pay any interest rate fees – however, it comes with the obvious drawback of having to pay a huge amount upfront. 

Leasing a car is a good option for people who don’t plan to own the car for a long time. Since leases are shorter and usually cover only a portion of the car’s value, people who don’t want to have long-term ownership of the vehicle can save money as long as they abide by the restrictions. Leases usually employ a stricter monthly payment scheme.

Finally, financing a car is the best option for people who are looking for flexibility in their deal. Getting a car loan from a bank or dealership you trust will often mean that you can negotiate things like the interest rate, length of the loan, and frequency of payments. You will sometimes also have the freedom to pay the full amount and end the car loan early. 

If you’ve read this far, you’re likely in the market for a car. Don’t miss our Used Car Buying Guide for some great tips that will save you time and money.

With all that being said, financing a car is definitely the way to go if you plan on owning it long-term. You will have complete freedom over all the decisions related to the vehicle and will have 0 restrictions when operating it. The longer payment period might seem daunting, but having the option to negotiate a low and agreeable interest rate will more than make up for it! 

Car Financing Ontario: How Does Car Financing Work?

Getting a car loan in Ontario normally means going through a process that needs to be carefully and decisively maneuvered. The entire process is, essentially, you trying to prove to a financial institution that you’re trustworthy enough for a loan. The financial institution will then decide whether to accept or reject your request for a car loan. 

Preparation is everything when it comes to getting a car financed, so do your research beforehand! Here are some things you should expect when attempting to finance a car in Ontario.

Applying for a Car Loan: What You'll Need

Make sure you have the following requirements ready before even filling up any forms. Remember that you will need to be above the age of minority to apply. 

  • Government-issued identification
  • Proof of income
  • Proof of residency/current address
  • Social insurance number
  • Down payment, if any (cash is preferred but some places allow credit cards)
  • Credit score/consent to a credit rating check
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Getting a Car Loan

You have three main options when getting a car loan in Ontario: banks, dealerships, and online service providers. Each one has its own pros and cons that you should understand before applying for a loan. 

You have three main options when getting a car loan in Ontario: banks, dealerships, and online service providers. Each one has its own pros and cons that you should understand before applying for a loan. 

  • Ontario Banks: Lots of different local and international banks offer car loans. If you already have a preferred bank, then inquiring about their available vehicle financing options is a good place to start. However, banks don’t want to lose money and will typically favour those people with higher credit scores or an existing history with them. Be prepared for a long process with lots of meetings and paperwork.
  • Ontario Dealerships: Most car dealerships offer in-house financing options. These are convenient since the entire process is done in one place and can usually end up with you driving off the property in the vehicle you want before the day ends. However, loans with dealerships tend to have more restrictions and have higher interest rates. 
  • Specialty financing companies: Unlike the previous two options, specialty financing companies like Car Loans Canada allow you to do the entire car loan application process from the comfort of your own home. They also tend to accept people with bruised credit more than banks and dealerships.

Be very thorough and compare your different options. Rates will tend to vary among different companies, even if they’re the same kind of institution. Some places will also require you to have a down payment while others won’t. Do a lot of research on the auto loan deals offered by your local banks and dealerships! 

Repaying An Auto Loan

Your general loan payment scheme might vary depending on where you take out the loan, what vehicle model you’re interested in, and your credit score. Most lenders in Ontario will ask you how much you’re willing to pay per month and then will negotiate your payment term. On top of this, you will also have to agree on an interest fee that will be added to your monthly payments. 

Understanding Payment Car Financing Terms

Payment term refers to the amount of time a customer is given to pay for an invoice. This also includes all the conditions that a customer has to meet before the vendor considers the sale completed. When taking out a car loan, this refers to the length of time you have to completely pay for the entire value you loaned and the conditions of your monthly payments.

For example, you take out a loan for 30,000 dollars and agree to pay it back over the course of 72 months with an 8.4% annual interest and a minimum monthly payment of 532 dollars. This means that you will have to pay 72 monthly payments of 532 dollars plus that month’s interest.  

Remember that you don’t necessarily have to take out a loan for the entire value of the vehicle. If you have 10,000 dollars ready as down payment, then you will only need to take out a loan for the 20,000 dollars. This will save you on interest fees.

How to Calculate Interest for a Car Loan

Interest serves as your fee for using money that isn’t yours. Your monthly interest payments can be computed by first dividing the interest rate by how many payments you’re making per year. Multiply this to the amount you still need to pay off. This will give you that specific month’s interest.

In our example earlier, calculating for the interest of your first monthly payment will require you to divide 8.4% by 12 (since you’re making monthly payments) and then multiplying that to your remaining balance of 30,000. This will give you 210 dollars that you need to pay on top of your monthly repayment amount. 

Take this 210 and subtract it from your monthly payment of 532 dollars. This gives you 322 dollars – which is the amount you’ve repaid from your total loan. Subtracting this from your total balance of 30,000 will give you your new balance of 29,678. If you made a down payment, then subtract that amount from the total cost before doing any of these computations. Car loan calculators can help you with the entire process if you find any of this confusing. 

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Car Financing Application Checklist

Alright, so you’ve decided that you need a car and want to take out a loan to help you pay for it. Here’s a short list of things you need to prepare for your loan application.

Credit Report and Score

Your credit report will be used by lending institutions to determine how trustworthy you are with credit. Some institutions won’t require you to bring your own credit report because they will look up your credit history themselves – but having an idea about what your score is beforehand will definitely help.

Know the Make and Model of the Car you’re going to Finance

Knowing the specific make and model you want before even applying for a loan will help you tighten up your budget. This will prevent you from getting swayed by sly salespeople who will try to sell you on more expensive options. Another benefit of having a specific vehicle model in mind is that it will speed up the entire process since you won’t have to do any more browsing. 

You should also decide whether you want a brand new car or a used car. For more information on buying used cars, check out our guide here.

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Gather Your Personal Financial Information

Personal financial information usually comes in the form of documentation of your current accounts, financial statements, tax forms, credit cards, or even property titles. Lending institutions will use this information to get an idea about your current financial situation to see if you can actually handle the financial responsibility of taking on a loan.

Bring Your Driver's License

This basically works as both identification and proof that you can actually drive the vehicle that you’re looking to purchase.

Documented Employment History / Income

Similar to your financial information, your income and employment history will give lenders an idea about your financial situation. You will be asked to provide your type of employment and monthly income. Your income can include your salary, income from investments, and government assistance among other things.  

Your Banking Details

While not needed for the application itself, most lending institutions will ask for your bank details to help set up and process your monthly vehicle loan payments directly from your bank. 

Ready to Finance your Next Car?

Once you’ve accomplished all the requirements and paid your down payment, all that’s left is to wait. The company you sent your application to should get back to you with their answer. Once accepted, you can finally pick up your new car. Don’t forget to pay your monthly vehicle dues!