Car financing options

From: Financial Consumer Agency of Canada

Car loans

If you want to buy a car, one option is to get a loan

There are ​two different ways you can get a loan:

  • loan arranged through a dealer
  • loan or line of credit obtained by you directly from a financial institution​

Loans arranged through a dealer

Most dealers will make loan arrangements for you with a lender. You can apply for and receive a loan directly in the dealership.

When you visit a dealership, dealers can arrange financing for you with:​

  • a financing division of the manufacturer
  • a financial institution, such as a bank or credit union
  • an independent finance company, such as one that specializes in providing car financing​

Loans or lines of credit from a financial institution

You may be able to get a loan or line of credit through your financial institution rather than getting a loan from a dealer.

If you have a strong relationship with your financial institution (for example, you have a bank account, mortgage and/or a credit card that are in good standing), you may be able to negotiate a better interest rate on a loan or line of credit than you could through a dealer.

Car leases

Leasing is similar to a long-term rental. When you lease a car, you make regular payments for the use of the car over a set period of time, typically 3 to 5 years. You are not buying the car and will not own it when the lease ends. However, lease contracts typically give you the option to buy out the car at the end of the lease term.

Leasing is more common for consumers who like to have a new car more often and don't want to sell or trade in their previously purchased car.

Leases are typically arranged through dealers. There are usually conditions and restrictions attached to a lease and it is important that you fully understand what they are before you sign the contract.

Pros of leasing a car

  • payments are generally lower than a loan with the same term, which can make it easier to budget for a lease in the short term
  • you can get a new car every few years if you qualify for a lease
  • some leases may be covered by warranties for the length of the lease for major defects and repair expenses
  • you can usually choose to buy the car, return it or lease a new one when your lease ends

Cons of leasing a car

  • you may end up paying more overall than if you had bought the car, especially if you choose to buy the car at the end of your lease
  • you will not own the car after the lease ends
  • breaking a lease before it ends can be very costly
  • you may have to pay extra fees and costs, such as fees for excessive wear and tear
  • you can usually only drive the car a certain number of kilometers, otherwise you have to pay an extra fee when your lease ends

Rent-to-own plans

Some companies may give you the option of a rent-to-own plan for a car.

Most rent-to-own plans are similar to car leases. You agree to make regular payments for a certain term. You then have the option of returning the car or buying it at the end of that term.

With a car lease, you typically make your payments to a third party financial institution, such as a bank or a credit union. With a rent-to-own plan, you make your payments directly to the dealership or car rental company.

Rent-to-own plans are designed for people with low or no credit. You will typically end up paying more for a car using a rent-to-own plan than if you buy or lease the car through a dealership.

You don’t actually own the car when you sign up for a rent-to-own plan – the rent-to-own company does. This means that they can take the car back, or repossess it, if you miss your payments. You won’t get your money back if the car is repossessed.

Learn more about rent-to-own plans.

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