Car Loans in Ontario: How Dealer Financing Actually Works

Photo: American Honda (Honda US Newsroom). 2026 Honda Civic.

Most car buyers in Ontario finance the vehicle. Some use a personal line of credit or arrange financing through their own bank. The rest let the dealer arrange it. There's nothing wrong with any of those choices, but each one has trade-offs OMVIC expects buyers to understand.

The two most important things to know about dealer-arranged financing: (1) the dealer is usually paid a fee by the lender for arranging the loan — that fee varies by lender, and a higher rate can mean a bigger fee for the dealer; and (2) the application may be submitted to more than one lender, which can affect your credit score. Both of these are normal industry behaviour — but you should know about them before you sign.

What OMVIC expects you to verify before the credit app goes in

• Pull your own credit score from Equifax or TransUnion before you apply. The score the lender sees may not be the only number that matters.
• Contact your own bank or credit union before you visit the dealership. Find out what rate and term they can offer so you have a comparison point.
• Ask which lender(s) the dealer intends to submit your application to. Multiple applications can hurt your credit score.
• Read the credit application carefully before it's submitted. OMVIC has seen cases where dealers (or buyers) inflate income or understate debt to get an approval. That's illegal, and it creates problems later.
• Ask for a copy of the submitted credit application.

The "reserve" — what it is and why you should care

When a dealer arranges financing through an external lender (Honda Financial Services, Scotia, RBC, etc.), the dealer is usually paid a fee called a reserve. The reserve is built into the interest rate on the contract. A 7.99% loan might carry a 2-3% reserve; a 4.99% loan might carry 0.5% or none. The difference goes to the dealer, not to you.

This isn't hidden. OMVIC requires dealers to disclose that the rate they're offering can include a reserve and that the size of the reserve varies by lender. The practical implication is straightforward: a lower rate isn't just better for your monthly payment, it's also better because less of it is being paid to the dealer as commission.

Photo: American Honda (Honda US Newsroom). 2026 Honda Civic.

Open vs. closed loans, prepayment, and the long-term warning

An open loan can be paid off at any time without penalty. A closed loan has a prepayment penalty if you pay it off early. Closed loans usually carry lower rates because the lender has more certainty. If there's a real chance you'll want to pay the loan off or refinance in the next two or three years, an open loan is often worth the slightly higher rate.

Beyond structure, the biggest financial landmine on car loans is extended term length. Stretching payments out to 84 or 96 months makes the monthly number comfortable, but it also puts you deep into negative equity for years — meaning you'll owe more than the vehicle is worth if you want to trade it in before the loan is paid. OMVIC has a separate page on negative equity; we'll cover it in its own article.

What to verify at delivery (when the loan contract is signed)

• The interest rate on the contract matches what you were quoted
• The term length matches what you agreed to
• No fees were added that weren't in the original quote
• All verbal promises are written into the contract — OMVIC's guidance is direct: if a dealer promises something (rate renegotiation after 12 on-time payments, for example), get it in writing
• If the loan amount changed from the original quote, ask why before you sign