5 common pitfalls to avoid when financing a car in Canada

Buying a car in 2026 is an expensive decision for Canadian drivers. On average, it costs about $1,373 monthly in ownership expenses. Whether you choose a new or used vehicle, there are several expenses you will incur that go far beyond the sticker price. Registration fees, gas, maintenance, and insurance are just some of the costs that you’ll take on once you become a car owner. 

Financing a vehicle can make the prospects of car ownership more affordable. But it often comes with long-term implications that are easy to overlook at the time of purchase. 

When you finance a car, you agree to take out a loan from a lender that you’ll pay back with interest in installments. The added interest means you’ll end up paying more for the vehicle than its sticker price (MSRP), which can add up quickly over time. 

Before you sign a financing agreement, it’s essential that you understand what you’re committing to and how it can impact your future financial decisions. Let’s dive into common pitfalls you should avoid when financing a car.

Here are five common pitfalls to avoid when financing a car

1. Overextending on financing

Overextending on financing refers to taking on more debt than you can comfortably afford. This means committing to monthly car payments that strain your budget, without factoring in other living expenses like rent and groceries. If you’re in a position where you’ve overextended, you may find yourself relying on credit cards for daily expenses, using your savings, missing payments, and even considering taking out additional loans to pay off your debts. 

Living with a high debt-to-income ratio can be a stressful experience that is often not considered when buying a car. With the cost of car ownership rising across Canada, being overextended is more common than you might think. A recent study found that over 80% of Canadians expect to pay less than $750 per month in car payments, and 32% expect to pay less than $250. However, data shows that the average monthly payment for a new car is nearly $900, and more than $760 for a used one. This disconnect in expectations can easily lead to overextending on financing. 

Before taking on car payments, it’s essential to calculate what you can realistically afford by considering your total expenses, not just the monthly payment.

Using Ratehub.ca’s car loan calculator, we calculated an estimated monthly payment an average Canadian could face, factoring in the vehicle price, loan term, interest rate and down payment. 

If you make an annual salary of $75,000, a $735 monthly car payment would be about 12% of your total income. In many cases, committing to this financing term could leave you overextended when you add in other car-related costs and daily living expenses. Comparatively, if you make an annual salary of $100,000, the car payment would be just under 9% of your income, making it more affordable.

Leveraging an auto loan calculator can help you figure out your ideal vehicle financing scenario before committing, and give you clarity on how much car you can afford. 

2. Rolling over debt

Rolling over debt happens when you add an existing unpaid car loan balance to the financing for a new vehicle. For example, let’s say you took out a $30,000 loan to buy a car. A few years later, you decide you want a newer model and trade in the old car, but you still owe $18,000 on the loan. Now the old car is only worth $16,000, leaving you with $2,000 of ‘negative equity’, which refers to the money you still owe on the vehicle that’s more than what the car is worth. When you finance the new car purchase, the $2,000 gets added to the new loan balance. This means you’re starting your new car loan already in debt. Your payments are higher than they would’ve been if you didn’t roll over the $2,000, and so are your interest payments. 

In theory, rolling over debt can be a helpful way to buy a new car without paying the remaining balance out of pocket. But the reality is that you end up paying much more in interest over the duration of the loan, putting you deeper in debt. Not to mention, once you finally pay off the debt, you will have paid significantly more than the cars are worth. 

Alternatives to rolling over debt include holding onto the car until the loan is paid off, paying the remaining balance in cash before trading it in, or upgrading to an affordable new vehicle to minimize your monthly payments. Anytime you finance a car, you will end up paying more than the vehicle's face value due to interest, but avoiding debt rollovers is the best option when it comes to financing a vehicle.

Other scenarios where you may find yourself rolling over debt could be if you’re a victim of auto theft. Let’s say your financed vehicle gets stolen with a remaining balance of $10,000 on the loan, and the car is only worth $7,500. If you choose to buy a new car, you’d have to either pay off the unpaid balance first or roll it onto your new car loan. Your expenses in this scenario will depend largely on whether you have comprehensive car insurance. Without it, you would be on the hook for the full $10,000 yourself. With coverage, you’d get an insurance payout, which can help you pay off the remaining balance before taking out the new loan. To avoid getting into a cycle of debt, it’s ideal to pay off the stolen car first before financing a new one.

3. Underestimating how a car loan can impact other financial goals

Once you’ve considered your budget and factored in your total costs, you may decide that car financing is the right choice for you. If you’re in this position, it’s essential that you think about your other financial goals before signing a financing agreement. 

In many cases, taking out a car loan can affect your eligibility for other major purchases, like buying a home. Having debt can lower the mortgage balance you’re approved for and affect whether you can afford to purchase your dream property. 

Also read: How much home can I afford?

Using Ratehub.ca’s mortgage affordability calculator, we compared the maximum home price a Canadian would be approved for in Toronto, Ontario, with and without a car payment, for two typical income scenarios.

Scenario 1: 

In this scenario, the home buyer has an annual salary of $100,000, a down payment of $30,000, an amortization period of 25 years and a car payment of $714 per month. 

Scenario 2: 

In this scenario, the home buyer has an annual salary of $150,000, a down payment of $50,000, an amortization period of 25 years and a car payment of $714 per month. 

In both scenarios, the home buyer with a car payment is approved for a lower home price than the buyer who is debt-free. Scenario 1 shows a larger decrease than Scenario 2, even though the car payment remained the same. This highlights how significant debt can be to your eligibility, depending on factors such as your annual salary. 

A lower approval amount can make you less competitive in bidding scenarios, push you out of a specific neighbourhood, and eliminate the type of property you can buy. 

If you’re planning to make a large purchase in the near future, consider whether taking out a car loan makes sense for you long-term. You may want to purchase a less expensive vehicle or opt to buy it in full rather than finance it. 

4. Overlooking the cost of repairs 

The cost of vehicle maintenance and repairs is rising across Canada. So much so that the expense should be a serious consideration when deciding which car to buy. According to the J.D. Power 2025 Canada Customer Service Index—Long-Term (CSI-LT) Study, the average cost per visit at dealerships is $539 (up from $465 in 2024). The average number of annual dealership service visits for cars aged 4 to 12 years is 1.8%, the highest level recorded in the past four years. 

New cars are typically covered by warranties, so you won’t need to factor in repairs into your immediate budget. Keep in mind, a warranty is generally only 5 years, so depending on your financing term (e.g. 8 years), you will need to eventually budget for higher maintenance costs. Used cars, on the other hand, are more likely to require maintenance or repairs sooner and may be more extensive due to the vehicle's age. That means you should expect to spend a fair amount on maintenance and repair expenses, especially if you plan to keep your vehicle for an extended period.

No warranty means you’re at risk for unexpected costs. To ensure you are financially prepared, set a realistic repair budget that you’d be willing to spend and factor that into your financing decision. Does it make sense for you to finance a 6-year-old car without a warranty that could cost you hundreds to thousands of dollars additionally? The answer will depend on what you feel comfortable putting aside for repairs. 

5. Not considering your total expenses

As we’ve mentioned throughout the article, financing a car is more than just the monthly payment. In 2026, the average monthly cost of car ownership is estimated at $1,373, including gas, parking, registration fees, maintenance, and auto insurance. All of these costs combined can drain your wallet if not considered carefully.

Insurance specifically is a significant expense to factor into your total car-buying budget, as prices are increasing nationwide. For many buyers, insurance premiums are a dealbreaker. In fact, The Globe and Mail reports that Canadians are hitting a breaking point with car insurance, with some people choosing to keep their cars longer, forgoing buying a second vehicle, or opting for models that are cheaper to insure. 

To factor auto insurance into your budget, it’s important to get pricing estimates before committing to a vehicle, so you can get a clear picture of what your premiums could look like as part of your budget. 

Using Ratehub.ca’s auto insurance quote comparison tool, we compared the insurance prices a 30-year-old male with a clean driving record in Toronto, Canada, would face for different car models. 

^{*The quotes include a $1,000 deductible for comprehensive and collision insurance and $1,000,000 in liability insurance. No bundling or telematics discounts were applied.} 

The table above shows how prices can vary by vehicle. In our scenario, the driver profile stayed the same, yet the quoted premiums ranged by over $1,300. The actual cost you’ll pay depends on more than just the car; it also depends on your location, age, driving history, and claims history. To get a personalized rate, compare auto insurance quotes today on Ratehub.ca.

Other variable costs you should consider when deciding if financing a vehicle is right for you include parking and gas. Your monthly total will depend on your lifestyle, like where you live and how much you drive. Having an idea in mind can help you estimate your cash expenses. 

The bottom line

Owning a car is expensive in Canada, and financing can often make it more affordable. However, vehicle financing is not always the best option if total cash expenses aren't taken into account. Understanding the total cost you’re committing to can help you avoid common pitfalls, such as overextending yourself and rolling over debt. By setting a realistic budget and carefully comparing your options, you can decide whether financing a car is right for you without putting additional pressure on your wallet.

For more information about the financial risks when buying a car, visit the Government of Canada website.

Also read:

• Leasing vs. financing a car (and how it impacts your insurance)
• 15 ways to get cheap car insurance in Canada 
• Car buying guide: How to buy a car in Canada
• What is the total cost of car ownership?