The prospect of buying a vehicle can be daunting, especially if you are considering adding to your monthly debt load by obtaining a car loan. It may be difficult to know where to start. Below, we’ve answered some of the most frequently asked questions about car affordability and car loans to help you make the best choices when deciding to lease or finance a new or used vehicle.

How much should I spend on a car?

When it comes to a new car, perhaps the better question to ask is: “How much should I spend?” The best way to determine which is the best choice for you and your finances is to start with a budget. If, however, your choice isn’t based on car affordability and strictly preference, there is another rule of thumb you can follow:

  • 10% of your salary: If you believe buying a car is a necessary evil. You only drive because your work requires it, but you get no joy out of it.
  • 20% of your salary: You want a safe, reliable, and affordable car for commuting and errands. It’s not about power or aesthetics, it’s about function.

What are the typical fees I should expect when buying a car?

While the exact fees you’ll end up paying will vary based on your area and the car you buy, taking the below into consideration can be a good starting point:

  • Sales tax: Typically, taxes may cost 5% to 15%, depending on your province.
  • Registration fees: You can estimate these by visiting your provincial service centre.
  • Processing fees: Yours will vary by dealership and province, but commonly it ranges from $100 to $400.

Is it cheaper to lease a car instead of buying one?

It depends on whether you’re focused on the long-term or short-term costs. Leases generally have lower monthly payments than car loans, but any equity your car maintains is lost when you return it to the leasing company. This means they’re good for short-term budgets, but are typically more expensive in the long run since you’ll never get to the point where you own the car and no longer have to make payments.

How much should I spend on a new versus old car?

Over the last two years, securing a used vehicle has proved problematic for drivers who are facing stiff competition and steep prices on the secondary market. Shrunken supply has inflated prices to the point that some used models are now worth so much, they’re selling for more than their new counterparts. Dealerships are having a difficult time finding inventory, and when they do, there is intense competition on the wholesale marketplace. As a result, the price of the few available used vehicles are almost, if not exactly, on par with the price of a new car, though a lower-end model.

How much should I budget for my new car based on my income?

Your monthly car payment budget calculation is based on your income. To determine your budget, simply multiple your annual income by 10% or 15%.  Therefore, if your annual income is $60,000, you should be allocating anywhere from $6,000 to $9,000 for your vehicle. This means your monthly budget for car payments will range from $500 to $750. One of the best tools you can use to understand how much you can manage to pay for your car is an online loan calculator tool. They will break down the loan specifics including length of term, interest, monthly payments, down payment amount (including cash paid in hand upfront, trade-in values and any rebates), and will give you a better idea of the actual amount you’ll need to pay.

How do I reduce my car loan costs?

To reduce your overall car loan costs, you can apply for a shorter loan term to ensure you don’t pay as much in interest. Make sure your credit score is healthy to secure a lower rate. To reduce your monthly payments, taking out a longer term will help keep your monthly payments low, though you’ll pay more in interest overall. You can also make a higher down payment to lower the loan amount you apply for, which is a great tip to manage car affordability.

I have bad credit and want to buy a used car. Are there loans available to me?

Yes, there are many bad credit car loan options in Canada. While you may have a harder time qualifying with banks if you have bad credit, there are many reputable online lenders who will be willing to finance your car purchase.

What can I do to qualify for a higher car loan?

 According to, there are a few tips you should consider to increase your buying power by maximizing the amount you may qualify for:

  • Keep your spending in check. Come up with a budget to help you keep tabs on your spending. This will help you create less debt while putting more into savings.
  • Cut down on debt. If your debt is a bit out of control, consider hunkering down to pay off as much as you can before buying a car and applying for an auto loan.
  • Comparison shop. Don’t apply for a car loan with the first lender you come across. While that may be the one you end up working with, you should still see what else is out there. You can use an online loan aggregator to compare different car lenders and loan offers.
  • Use a cosigner. You can minimize the risk for the lender by adding a cosigner to your car loan contract. This will not only boost your odds of loan approval, but you may also secure better terms, a lower rate, and a higher loan amount.

We hope that the answers provided here will help you secure the financing you need for your next vehicle. Doing some research into your finances to understand car affordability will serve to save you money and undo stress in the long run. Speak to one of our isure representatives about the effects that a new vehicle can have on your rates. Always contact your isure broker (or your insurance company) prior to signing on the dotted line to better understand how your car insurance premiums will be effected.

Related Articles