Understanding Car Loans in Canada

1. What is a car loan?

A car loan lets you borrow money to purchase a vehicle and repay it over time, usually with interest. Financing may be arranged through a dealership, bank, credit union or other lender.

• Vehicle selling price: the agreed price before applicable taxes and other charges.
• Down payment: cash you pay upfront.
• Trade-in allowance: the amount offered for your current vehicle.
• Amount financed: the principal you borrow, which may include taxes, fees and optional products.
• Interest rate: the rate used to calculate interest.
• Loan term: how long you have to repay the loan.
• Payment frequency: how often you pay.

2. Interest rates vs. APR

Interest is the cost of borrowing. All else equal, a higher rate means more interest paid.

APR (annual percentage rate) is an annualized measure of borrowing cost used in credit disclosures. Depending on the applicable rules and financing charges, APR may differ from the stated interest rate.

Before signing, ask for the stated interest rate, disclosed APR, total cost of borrowing and any applicable fees. Confirm whether the rate is fixed or variable.

3. Monthly vs. bi-weekly payments

Monthly: typically 12 payments per year. Regular bi-weekly: typically 26 payments per year.

For budgeting, $500 per month equals $6,000 per year, or about $230.77 every two weeks when spread evenly across 26 payments.

Always compare payment amount, frequency, total number of payments and total cost.

4. Why loan term matters

Extending a loan usually lowers the regular payment, but increases total interest when the rate and amount borrowed stay the same.

Example: $30,000 financed at 7% annual interest

Illustrative estimates for a fixed-rate, fully amortizing loan, using a nominal 7% annual rate divided by 12 and unrounded monthly payment calculations. Taxes, fees and optional products excluded. Payments shown are rounded; lender figures may differ.

5. Calculate the total cost

For a standard fully amortizing loan, total loan payments = regular payment × number of payments. Total interest = total loan payments − original principal, assuming no additional charges, early repayment or changes to the payment schedule.

Your full vehicle purchase cost can also include a down payment, taxes, dealer charges and optional products. Ask for an itemized breakdown rather than comparing payments alone.

6. Down payments

A down payment reduces how much you borrow. Borrowing less generally means smaller payments, lower total interest and less risk of negative equity, all else equal.

But keep enough cash available for insurance, maintenance and unexpected expenses.

7. Trade-ins and negative equity

Trade equity = trade-in allowance − outstanding loan payout.

Positive equity example: A $20,000 trade-in allowance minus a $15,000 payout leaves $5,000 of positive equity.

Negative equity example: An $18,000 trade-in allowance minus a $25,000 payout leaves $7,000 of negative equity.

If a lender allows that $7,000 shortfall to be rolled into your next loan, you borrow more than the new vehicle purchase alone requires. This increases borrowing costs and financial risk.

8. Alberta GST and eligible trade-ins

In Alberta, GST is generally 5% on taxable vehicle sales by GST/HST registrants. For a qualifying trade-in, GST may be calculated on the difference between the new vehicle's taxable price and the eligible trade-in allowance.

Without the eligible trade-in, GST on $40,000 would be $2,000, a difference of $750 in this simplified example.

Loan payout is separate: an outstanding trade-in loan does not itself reduce the GST taxable amount. It affects your financing calculation.

Trade-in eligibility, taxes on fees or products, and provincial rules may differ. This example assumes an eligible trade-in and excludes other taxable charges.

9. Dealership vs. bank financing

Dealership financing may offer access to manufacturer programs and multiple lenders. You may also apply directly through a bank or credit union. Neither is always better.

Compare the APR, amount financed, term, total borrowing cost, fees, optional products and early repayment conditions for each offer.

10. Warranty, GAP and protection products

You may be offered additional products when financing:

• Extended warranty or service contract: may cover certain repairs, subject to exclusions, deductibles and contract limits.
• GAP protection: depending on the contract, may address an eligible shortfall after a covered total loss.
• Protection packages: may include appearance, tire-and-wheel or other coverage.

Ask what each product covers, excludes and costs, whether it is optional, and whether its price is financed. Financing optional products may add interest to their cost.

11. Seven questions before signing

1. What is the full vehicle selling price?
2. What is my total amount financed, including taxes, fees and products?
3. What are the stated interest rate and APR?
4. How many payments will I make, and how often?
5. What is the total cost of borrowing?
6. Can I repay early, and are there any applicable conditions or charges?
7. Can I review the full agreement and disclosure documents before signing?