A car loan is simple once you see the moving parts: the amount you borrow, the interest rate, the term, and the vehicle that secures the loan. Here's how each one works in Canada, with the Saskatchewan rules that apply when you sign here.
The basics: what you're agreeing to
You borrow money to buy a vehicle and pay it back in equal payments, usually monthly or every two weeks, over a set term. Each payment covers that period's interest first, and the rest pays down what you owe.
- Amount financed: the price, plus tax and any add-ons you agree to, minus your down payment and trade-in.
- Interest rate: the yearly cost of borrowing, shown as an annual percentage rate (APR).
- Term: how long you have to pay it back, often 36 to 84 months.
- Security: the vehicle itself. That's why car loans usually cost less than unsecured loans.
Who owns the car when you finance it?
You do. The vehicle is registered in your name with SGI and you insure it. The lender registers a security interest, often called a lien, against it in Saskatchewan's Personal Property Registry. If the payments stop, the lender can take the vehicle back and sell it. Once the loan is paid in full, the lender discharges the lien.
This is also why buying a used vehicle privately needs a lien search first. A lien stays with the vehicle, not the seller, so a car with an old loan on it can be taken from the new owner.
How the interest works
Most car loans charge interest on the balance you still owe. Early on, the balance is highest, so more of each payment goes to interest. Later, more goes to the loan itself. Nothing is hidden in that: it's how any declining-balance loan works.
| $25,000 over 72 months | Payment | Total interest |
|---|---|---|
| At 6.99% | about $426 a month | about $5,700 |
| At 9.99% | about $463 a month | about $8,300 |
| At 19.99% | about $599 a month | about $18,100 |
The rate matters more than almost anything else, so it's worth knowing what you qualify for before you pick a vehicle. Try your own numbers on the car loan calculator.
What decides your interest rate?
- Your credit history: on-time payments, how much of your available credit you use, and any bankruptcy or consumer proposal.
- Your income and debts: lenders check that the new payment fits beside what you already pay each month.
- The vehicle: newer, lower-kilometre vehicles usually get better rates than older ones, and some lenders won't finance vehicles past a certain age.
- The term and down payment: longer terms and small down payments carry more risk for the lender.
In Canada, the legal maximum on most consumer loans is 35% a year, including fees. A rate close to that should make you ask what else is on offer.
How long should a car loan be?
Longer terms lower the payment but raise the total cost, and they keep you owing more than the vehicle is worth for longer. That gap, called negative equity, becomes a problem if you want to trade in early. A good rule: keep the term no longer than you plan to keep the vehicle, and shorter if the vehicle is already a few years old.
Can you pay a car loan off early?
In Saskatchewan, yes. You can pay off a consumer loan, in full or in part, at any time without a penalty. Extra payments go to the balance and cut the interest you pay. Before you sign, check that the agreement applies extra payments to the principal.
What the lender must show you
Before you sign, the lender has to give you a written disclosure with the annual percentage rate, the total cost of borrowing, the payment amount and schedule, and any fees. Read it, and compare it with the numbers you were quoted. If something was added that you didn't ask for, such as a warranty or insurance, you can ask for it to be removed.
Does a car loan help or hurt your credit?
Applying leads to a credit check, which can lower your score slightly for a short time. After that, a car loan paid on time builds your credit, because most car lenders report to Equifax, TransUnion or both. Missed payments do the opposite and stay on your report for years.
Will a car loan affect a mortgage application?
Yes. Mortgage lenders add your car payment to your other debts when they work out how much you can borrow. Under CMHC's limits for insured mortgages, total debt payments, housing included, can't be more than 44% of your income before tax. If you're planning to buy a home soon, talk to your mortgage broker before you take on a car loan.
Dealer financing, bank loan or line of credit?
- Dealer financing: convenient and sometimes includes manufacturer rate offers on new vehicles. The dealer arranges it with a lender and may earn a fee for doing so.
- Your bank or credit union: a pre-approval gives you a rate to compare against and lets you shop like a cash buyer.
- A line of credit: flexible, but the rate usually changes over time and there's no fixed end date unless you set one.
Whichever you choose, compare the APR and the total cost of borrowing, not just the payment. Our car buying guide walks through the rest of the deal.