The basics of Car Loans and how car payments work

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If you are considering buying a car, then there is a strong possibility that you are also considering getting a car loan. Typically, most Canadians prefer securing an auto loan that allows them to pay for the vehicle over time. If you are like most Canadians when it comes to car loans, then you are one of those people who prefer loans that can be paid over time, like bi-weekly or even monthly.

Trying to figure out the terms of auto loan payment when borrowing money can be very confusing, and that’s why we are here to help you understand it better. Our goal here is to help you understand how car loans work.

How do auto loans work?

It becomes easy to understand Car loans when you understand the basic terminology associated with them. There are three main components to consider when calculating payments on car loans. These include Principal Amount, Interest, and the term of payment.

The Principal

The principal refers to the total amount that is required in order to cover the cost of the item, in this case, the vehicle you would like to purchase. This amount usually includes the agreed-upon price, extra fees, any add-ons as well as sales tax. You also need to take into account the provincial sales tax (if applicable in your province) on the cost of the vehicle. The amount of the principal can be reduced by making a down payment. That means that if, for example, you want to get a car for $25,000, you could make a down payment of $5000, and then you only need to finance $20,000. The benefit of putting some down payment is that you pay less interest. The bigger the down payment, the less money you need as a loan and thus less interest accrued.

You can also get a loan without any down payment. However, some institutions require down payment for approval. If you have an automobile to trade in, it can also bring down the cost and act as a down payment. In most cases, the vehicle can also be traded in before the loan has been paid off completely. In that case, if your vehicle market value is $5000, and you owe $2000, you will have $3000 in equity that can be applied towards the purchase of your new car.


Interest is the amount that is charged by the lender for the loan issued to you. The amount for interest is calculated as a percentage of the principal amount known as APR – Annual Percentage Rate. Car loan rates differ and can be anywhere from 3% to 20% typically. Rates are based on various factors including your credit score and history as well as The Bank of Canada’s interest rate. Car Loans fall under the category of secured loans, which means that the value of the car enables the lender to get their money back even if you are unable to pay it back. This makes it easier to get a car loan approval.

One important thing to consider is that your credit score influences your interest rate. Your credit score is calculated based on how much debt you are currently in, your history of debt repayment on time, and some other factors. Financial institutions use credit history to conclude on the level of risk of lending money to you. The higher the credit score, the higher your chances are of getting a lower interest rate for your loan.

The Term

The term denotes the length of time it will take to pay your loan off, either through monthly, weekly or bi-weekly installments. Auto loan payment terms are generally between 3 years (36 months) and 6 years (72 months). It is possible to find loans with shorter payment terms as well. By opting for a longer loan term you decrease your monthly (or weekly or bi-weekly) as it spreads your payment over a longer time frame. This, however, leads to you making payments over a longer period of time.

What to do to secure an auto loan

Once you have decided on which car you want to get, all you have to do is contact Any Credit Auto Loans to get a pre-approved auto loan. You can contact us anytime by phone or simply fill out the online forms and we will contact you with the information on the auto loan that you qualify for. With a pre-approved loan, you can focus on which vehicle you can choose, making the car shopping experience more enjoyable as well as efficient.

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