How to Borrow Money for a Car Loan

If you're looking for a new set of wheels but don't have the cash to cover the entire cost of your next vehicle, you may be considering a car loan. Car loans are a great way to finance a vehicle and often come with flexible payment options.

However, because you're borrowing money from a third party, there are some risks you need to know about before signing your loan agreement.

If you'd like to learn more about car loans, you can take a look at our guide below.

What car loan options are there in Canada?

There are several types of Canadian loans available to those wanting to purchase a new or used car. Most of the time, you can apply for an auto loan through your bank, a credit union, or dealerships, giving you the option to shop around and find a better interest rate. Here's a closer look at these options below:

Personal loan

The most common auto loan Canadians use is a personal loan from a bank or credit union. Car loans are a type of secured loan with interest rates that can vary depending on the type of vehicle you wish to purchase and the value of the car itself. Because the loan is secured, you'll need to have collateral when signing your contract, which in most cases would be the car itself.

Most car loans in Canada have a fixed interest rate, meaning your payment amount will remain the same throughout your loan term. Depending on your specific contract, your loan payment may be made monthly or bi-weekly. Upon your car loan approval, a one-time lump sum payment will be deposited directly into your bank account.

Personal line of credit

Another option you may want to look at for your next vehicle purchase is a personal line of credit. A line of credit can either be secured or unsecured and is a type of revolving debt that works similarly to a credit card.

With a line of interest, you'll be pre-approved for a certain amount, which you can access at any time, or you can leave the funds untouched if you wish. However, you'll only pay interest on the money you borrow. Realistically, you can continue to use and repay your line of credit for as long as you make your monthly payments on time.

Credit lines typically have variable interest rates, which means your monthly payments will vary and fluctuate with Canada's prime rate. So, keep this in mind when looking for financing options and weigh whether or not the uncertainty of variable interest rates is something you're okay with when purchasing your next vehicle with a loan.

Car loans through dealerships

If you prefer to get a car loan from somewhere besides a financial institution or credit union, you can also finance cars directly through dealerships. When getting a car loan from a dealership, a sales consultant will reach out to third-party lenders and help you negotiate your loan amount and interest rate.

That said, you may be able to find a lower interest rate with your financial institution, given that you've already formed a relationship with them over the years.

How to apply for a car loan

By now, if you've decided that financing your vehicle in Canada is something you're ready to move forward with, you may have some questions about how to get a bank loan, which we've outlined for you below:

1. Get a quote for your loan online

First things first, when borrowing money, the best thing you can do is shop around with different lenders to guarantee that you're getting the best competitive rates available. Start with your bank, and then look at your car dealership as a final option.

3. Apply for your auto finance loan

Once you've found financing options that work best for your needs and budget, you'll need to contact the lender and apply for your car loan. During this time, your lender will run a credit report and take a look at your overall financial health to determine whether or not you qualify for the funds you're asking for.

4. Get your loan payment deposited in your bank account

Once you've gotten your approval, you'll receive one payment amount that will be directly deposited into your personal account.

5. Pay for your vehicle

From there, you'll be able to go back to your dealership and pay for your vehicle. Your dealership will make you sign a couple of documents before allowing you to drive off the lot with your new ride.

6. Make your monthly payments to pay off your loan

And lastly, don't forget that you'll need to make your financing payment each month until your loan amount has been fully paid off with interest.

Do you need a certain credit score to get a car loan?

When it comes to financing a vehicle, you may be wondering whether a certain credit score for a car loan is required. While the minimum score for a loan will vary between lenders, financial institutions typically have a greater minimum requirement than lenders you can find online. The standard credit score required for a car loan from a bank or credit union will range from 600 to 650.

So, keep in mind that you may not be able to get a personal loan with bad credit, depending on which lenders you're applying with.

Not sure what your credit score is? Get a free credit score check online and build your credit with KOHO today!

Can you buy a car with a credit card?

So, what about a virtual credit card? Can you buy a car with a credit card instead of taking out a loan? Generally speaking, yes, you can purchase a vehicle with a credit card. Similar to a line of credit, you'll be able to borrow up to your credit limit, which could realistically cover your costs on select vehicles.

Keep in mind that you'll have to pay back the amount borrowed by the deadline listed on your credit card statement, just as you would for any other transaction. If you use a credit card to buy a car and do not pay off the outstanding balance quickly, you could be facing significant interest charges.

Is getting a new car worth it?

Whether you're trying to budget and make plans for spending and saving, you may be debating, "Is getting a car worth it?" Like any transaction you make, it's important to weigh the pros and cons beforehand and evaluate your overall budget and the ongoing costs of car ownership.

Beforehand, you may want to make an appointment with your financial advisor to get a better idea of whether a car is a financially sound decision.

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With high-interest savings accounts and overdraft protection coverage, KOHO helps those in Canada streamline their savings and develop their financial literacy. Whether you want to learn more about secured vs. unsecured debt or have further questions about financing, our resource hub is available to you free of cost.