For most Canadians, a vehicle represents one of life's major purchases. With the average new car price in Canada exceeding $40,000 and used vehicles often costing well over $20,000, how you finance your purchase can have significant impacts on your financial well-being. This comprehensive guide explores the financing options available to Canadian car buyers, with specific insights for Ottawa residents.
The Financing Landscape in Canada
Before diving into specific options, it's important to understand the current financing environment in Canada as of late 2023:
- Interest rates have risen significantly over the past 18 months
- The Bank of Canada's policy rate influences auto loan rates across all lenders
- Average new car loan terms have stretched to 72-84 months
- Approximately 85% of new vehicles and 65% of used vehicles in Canada are financed rather than purchased outright
Major Financing Options Explained
1. Traditional Auto Loans
What They Are: Fixed-term loans specifically for vehicle purchases, typically ranging from 24 to 96 months in Canada.
Where to Get Them:
- Banks: Major Canadian banks like RBC, TD, Scotiabank, BMO, and CIBC
- Credit Unions: Local options in Ottawa include Alterna Savings, Your Credit Union, and Meridian
- Online Lenders: Companies like CarsFast, Canada Drives, and LendingArch
- Dealership Financing: Often arranged through the dealership but provided by their partner financial institutions
Current Rate Ranges (as of September 2023):
- Prime borrowers (credit scores 700+): 5.99% - 7.99%
- Good credit borrowers (credit scores 650-699): 8.00% - 9.99%
- Fair credit borrowers (credit scores 600-649): 10.00% - 15.99%
- Subprime borrowers (credit scores below 600): 16.00% - 29.99%
Advantages:
- You own the vehicle outright once the loan is paid off
- No mileage restrictions or wear-and-tear penalties
- Freedom to modify the vehicle
- Can be used for both new and used vehicles
- Ability to sell or trade in the vehicle at any time (though you must clear the loan)
Disadvantages:
- Generally higher monthly payments than leasing
- Risk of negative equity if vehicle depreciates faster than you pay down the loan
- Typically requires higher down payment than leasing
Ottawa Insight:
Ottawa residents should consider local credit unions for auto loans. Alterna Savings often offers rates 0.5% - 1% lower than major banks for members, and the approval process can be more personalized than with national lenders.
2. Leasing
What It Is: A long-term rental agreement where you pay for the portion of the vehicle's value that you "use up" during the lease term, plus interest (called the money factor in leasing).
Where to Get Leases:
- Manufacturer-affiliated finance companies (e.g., Toyota Financial Services, GM Financial)
- Dealerships offering manufacturer lease programs
- Leasing brokers (less common but available in Ottawa)
Current Lease Rate Factors (as of September 2023):
- Luxury vehicle brands: 5.99% - 7.99% (equivalent)
- Mainstream brands: 6.99% - 8.99% (equivalent)
- Special promotional leases: As low as 2.99% on select models
Common Lease Terms in Canada:
- 24 months (less common)
- 36 months (very common)
- 48 months (common)
- 60 months (less common, higher risk)
Advantages:
- Lower monthly payments compared to financing the same vehicle
- Lower down payment requirements (often first month's payment plus security deposit)
- Ability to drive a new vehicle every 2-4 years
- Manufacturer warranty typically covers most of the lease period
- GST/HST only paid on the monthly payments, not the entire vehicle price
- Simplified end-of-term process: return the vehicle, buy it out, or lease a new one
Disadvantages:
- Mileage restrictions (typically 16,000-24,000 km/year in Canada) with penalties of $0.10-$0.30 per excess kilometer
- Wear and tear charges for damage beyond "normal wear"
- No equity built up (you don't own anything at the end)
- Restrictions on vehicle modifications
- Difficulty terminating the lease early without significant penalties
- Generally only available for new or certified pre-owned vehicles
Local Leasing Consideration:
Ottawa's harsh winters mean vehicles often experience accelerated wear on components like windshields and undercarriages. When leasing in Ottawa, we recommend the lease protection packages that cover minor winter-related damage at turn-in.
3. Dealer Financing
What It Is: Loans arranged through the dealership, which may include special manufacturer-subsidized rates or dealer markup on standard bank rates.
Types of Dealer Financing:
- Captive Finance Companies: Manufacturer-owned lenders like Ford Credit, Toyota Financial Services, etc.
- Dealership-Arranged Bank Financing: Dealers work with multiple lenders to find approvals
- Buy Here, Pay Here: In-house financing offered by some used car dealerships (typically with very high rates)
Special Rate Offers:
- Promotional rates (sometimes as low as 0% on select models)
- "Cash back or low rate" offers (where you choose between a lower rate or rebate)
- Subvented leases with artificially high residual values to lower payments
Advantages:
- Convenience of "one-stop shopping"
- Access to special manufacturer promotional rates not available elsewhere
- Dealers can sometimes get approvals for challenging credit situations
- Can often be arranged same-day
Disadvantages:
- Potential for higher interest rates if the dealer adds markup
- Promotional rates may require forfeiting cash rebates or discounts
- Pressure to make quick decisions in the dealership environment
- Lack of transparency in some dealerships about the actual interest rate vs. the rate you qualify for
4. Home Equity Lines of Credit (HELOCs)
What They Are: Lines of credit secured by your home equity that can be used for any purpose, including vehicle purchases.
Current HELOC Rates (as of September 2023):
- Major Canadian banks: Prime + 0.5% to Prime + 1.0% (approximately 7.20% - 7.70%)
- Credit unions: Sometimes as low as Prime + 0% (approximately 6.70%)
Advantages:
- Generally lower interest rates than standard auto loans
- Interest may be tax-deductible if the vehicle is used for business (consult a tax professional)
- Flexible repayment terms
- No restrictions on vehicle age or type
Disadvantages:
- Puts your home at risk if you cannot make payments
- Variable interest rates that can increase over time
- Only available to homeowners with sufficient equity
- May extend the debt over a much longer period
Important Consideration:
With Ottawa's housing market values still near historic highs despite recent adjustments, many homeowners have substantial equity. However, using home equity for a depreciating asset like a vehicle should be approached with caution and a clear repayment strategy.
Making the Right Choice for Your Situation
Factors to Consider
1. Your Driving Habits
- High annual mileage (over 25,000 km/year): Leasing is likely not cost-effective due to mileage penalties
- Variable or unpredictable usage: Financing gives you more flexibility
- Predictable, moderate mileage: Leasing may offer advantages
2. Your Financial Situation
- Cash flow focused: Leasing typically offers lower monthly payments
- Long-term cost focused: Financing and keeping the vehicle after it's paid off is usually more economical
- Strong credit score (700+): Qualify for the best rates on either option
- Challenged credit (below 650): Special finance loans may be the only option, often at higher rates
3. Vehicle Preferences
- Like having a new vehicle every few years: Leasing aligns well
- Prefer to keep vehicles long-term: Financing makes more financial sense
- Want to modify your vehicle: Financing is the better choice
- Prefer predictable maintenance costs: Leasing a vehicle under warranty reduces unexpected expenses
Comparing Total Costs: An Ottawa Example
Let's compare options for a popular vehicle in Ottawa, the 2023 Toyota RAV4 AWD XLE (approximately $38,000 MSRP):
Scenario A: 60-month Financing at 6.99%
- Down payment: $5,000
- Monthly payment: $702
- Total paid after 5 years: $47,120
- Asset owned: Vehicle worth approximately $19,000 (50% of original value)
- Net cost of ownership (excluding maintenance, insurance): $28,120
Scenario B: 48-month Lease at equivalent 6.99%
- Down payment: $1,000
- Monthly payment: $515
- Total paid after 4 years: $25,720
- Asset owned: None (vehicle returned to dealer)
- Net cost of ownership (excluding maintenance, insurance): $25,720
Scenario C: 60-month Financing with HELOC at 7.45%
- Down payment: $0
- Monthly payment: $760 (interest-only payment would be lower but not recommended)
- Total paid after 5 years: $45,600
- Asset owned: Vehicle worth approximately $19,000
- Net cost of ownership: $26,600
This simplified example excludes taxes, maintenance costs, and insurance differences, but illustrates how the numbers can vary between options. For a complete analysis specific to your situation, we recommend consulting with a financial advisor.
Preparing for Financing Success
Before You Apply
1. Check Your Credit
- Obtain your credit report from both Equifax and TransUnion (free annual reports available)
- Review for errors and dispute any inaccuracies
- Consider credit monitoring services to track your score improvements
2. Improve Your Credit Position
- Pay down existing debt, especially credit cards
- Avoid applying for new credit in the months before car shopping
- Ensure all bills are paid on time
3. Research Current Rates and Offers
- Check manufacturer websites for special financing and lease offers
- Contact your bank or credit union for pre-approval and rate quotes
- Use online automotive loan comparison tools for current market rates
4. Prepare Your Documents
- Proof of income (recent pay stubs, Notice of Assessment, or T4)
- Proof of residence (utility bill or lease agreement)
- Driver's license and insurance information
- Banking information
- Down payment funds
Negotiation Tips
1. Separate the Negotiations
- Negotiate the vehicle price first, before discussing financing
- Don't reveal your monthly payment budget initially
- Get pre-approved before visiting the dealership to have leverage
2. Focus on the Right Numbers
- For financing: Focus on the total cost of borrowing and interest rate, not just the monthly payment
- For leasing: Pay attention to the money factor, residual value percentage, and any fees
- Always ask for the lending disclosure statement that shows all costs
3. Watch for Add-ons
- Extended warranties
- Credit insurance
- Fabric protection
- Paint protection
- Rust proofing
While some of these may have value, they're often marked up significantly in the finance office and can be purchased elsewhere at lower cost.
Ottawa-Specific Tip:
In the Ottawa area, electronic rust protection is often aggressively marketed due to our road salt usage. However, the Canadian Automobile Association (CAA) and most independent mechanics recommend traditional oil spray rust protection instead, which typically costs $120-180 annually versus $500-1,000 for dealer-installed electronic modules.
Special Considerations for Electric Vehicles
With Ottawa's push toward sustainability and the growing popularity of electric vehicles, there are special financing considerations for EVs:
Federal and Provincial Incentives:
- Federal iZEV program: Up to $5,000 rebate for eligible EVs
- Varying provincial incentives (none currently in Ontario, but this may change)
Special EV Financing Offers:
- Several manufacturers offer preferential rates for EV financing
- Some Canadian banks offer "green vehicle" discount rates (0.25%-0.50% below standard rates)
Leasing Considerations for EVs:
- Battery technology is evolving rapidly, making leasing potentially advantageous
- Residual values for EVs have been volatile, affecting lease payments
- Some EV manufacturers have more conservative residual value projections than others
Final Thoughts
Car financing is rarely one-size-fits-all. The best choice depends on your personal financial situation, driving needs, and long-term goals. By understanding your options and doing thorough research, you can make an informed decision that balances affordability with your transportation needs.
At OttawaAutoAssist, our car buying consultation services include assistance with evaluating financing options. We can help you determine whether leasing or financing makes more sense for your situation, review dealer financing offers, and even connect you with lender partners who can provide competitive rates.
Remember that a vehicle is typically a depreciating asset, so financing decisions should always be made with your overall financial health in mind. The goal is to secure reliable transportation that fits your needs without compromising your long-term financial well-being.
