XEQT vs Paying Off Your Car Loan Early: Where Should Your Extra Money Go in Canada?

Every two weeks, $387 leaves my account and goes to Honda Financial. It has been doing that for almost three years now, and every time I see the withdrawal notification, the same thought fires in the back of my brain: should I be throwing extra money at this thing, or should I be buying more XEQT?

I bet you have your own version of this. Maybe you are sitting on an extra $200, $400, or $600 a month after covering all your bills. You know you should do something smart with it. But which is the smarter move — killing that car loan ahead of schedule, or funneling it into a globally diversified ETF inside your TFSA?

I spent an embarrassing amount of time going back and forth on this. So I finally sat down, ran the math, dug into the Canadian-specific tax angles, and built a decision framework that actually settles the question. This is everything I found.

1. Why Car Loans Are Not the Same as Mortgages

If you have read my guide on XEQT vs mortgage paydown, you might be tempted to apply the same logic here. Do not do that. Car loans and mortgages are fundamentally different animals, and those differences change the calculus significantly.

Here is why:

Your car loses value every single day. A mortgage is attached to an asset that (historically) appreciates over time. A car starts depreciating the moment you drive it off the lot. A brand-new $40,000 vehicle might be worth $24,000 in three years. You are paying interest on something that is actively shrinking in value — and that makes the emotional and financial case for eliminating the debt stronger.

Car loan rates are higher. In 2026, most Canadian car loans sit between 6% and 8% for buyers with good credit. Used car loans and subprime financing can push well above 10%. Compare that to mortgages at 4-5% and the math shifts meaningfully.

There is no tax deduction. In Canada, car loan interest is not tax-deductible for personal vehicles. (The US allows deductions in some cases, which is why a lot of American advice does not apply here.) Mortgage interest is not deductible either in Canada, but at least homeowners can use strategies like the Smith Manoeuvre to make it deductible. No such option exists for your Honda Civic.

The timeline is short. Mortgages run 25 years. Car loans run 3-7 years. That shorter timeline means there is less room for compound growth to overcome the guaranteed return of paying off debt. A 2% annual spread in favour of investing barely registers over a 4-year car loan, but it adds up enormously over a 25-year mortgage.

The bottom line: the case for paying off a car loan is stronger than the case for paying off a mortgage, all else being equal. The rates are higher, the asset is depreciating, the term is shorter, and there is no tax angle to soften the blow.

2. The Math: Car Loan Rates vs XEQT’s Historical Returns

Let us get into the numbers. XEQT — iShares’ all-in-one equity ETF — holds roughly 9,500 stocks across 50+ countries. The broad global equity market has historically returned approximately 8-10% annualized over long periods. A conservative forward-looking estimate, after XEQT’s 0.20% MER, lands around 7-8%.

Canadian car loan rates in 2026 look like this:

Now here is the critical concept: the return on paying off your car loan is guaranteed, while the return on investing in XEQT is not.

If your car loan charges 7%, every extra dollar you put toward it gives you a guaranteed, risk-free 7% return in the form of avoided interest. No market crash can take that away. No sequence of bad years can undo it.

XEQT, on the other hand, might return 15% next year or -20%. Over 20+ years, the odds are strongly in your favour. Over a 3-5 year car loan? The range of outcomes widens significantly.

That matters. A lot.

3. Three Scenarios: Where Does $400/Month Go?

Let us say you have an existing car loan at 7% with $20,000 remaining and 4 years left. Your minimum payment is $478/month. You have an extra $400/month to work with. What happens under three different strategies?

Note: These figures are illustrative and rounded. XEQT returns are assumed at 8% annualized for scenario comparison. Actual returns will vary. This is not a forecast.

Scenario A: Minimum Car Payment + Invest the Surplus in XEQT

You make the $478 minimum car payment and invest the full $400/month in XEQT inside your TFSA.

After month 48, you redirect the full $878 ($478 + $400) into XEQT.

Scenario B: Aggressive Car Payoff, Then Invest Everything

You throw the entire $400 surplus at the car loan, paying $878/month total.

You save roughly $1,480 in interest and end up with a slightly larger XEQT portfolio because you are investing a bigger amount ($878 vs $400) once the loan is eliminated.

Scenario C: Hybrid — Split 50/50

You put $200 extra toward the car loan ($678/month total) and invest $200/month in XEQT.

Side-by-Side Summary

The surprise? The outcomes are remarkably close at 7% vs 8%. The spread between car loan rate and expected XEQT return is only about 1 percentage point, and over just 4 years, that gap barely compounds.

Scenario B actually edges ahead because the interest savings are guaranteed while XEQT’s returns are not. If XEQT has even one bad year during that window, Scenario A falls behind.

4. The Interest Rate Threshold: When Does Payoff Definitively Win?

Here is the framework I use. It is not perfect — nothing is when you are comparing a guaranteed outcome with an uncertain one — but it has served me well.

The threshold is around 6%. Below that, the expected spread between XEQT returns and your car loan rate is wide enough (and compound growth powerful enough, even over shorter periods) to justify investing. Above 6%, the spread narrows to the point where the guaranteed return of debt elimination becomes more attractive on a risk-adjusted basis.

And remember: this assumes you are investing in a TFSA, where gains are tax-free. If your TFSA is full and you would be investing in a non-registered account, the after-tax return on XEQT drops to roughly 5.5-6.5% — which makes paying off any car loan above 5% the clear winner.

5. The Canadian-Specific Angle: Why Our Situation Is Different

If you have been reading American personal finance content (and let us be honest, most of us have), you need to know that their advice does not always translate.

No Tax Deduction for Car Loan Interest

In the US, some borrowers can deduct auto loan interest under specific circumstances. In Canada? Zero deduction for personal car loans. Every dollar of interest is paid with after-tax money. This makes high-rate car loans even more painful.

The TFSA Advantage

Canada’s TFSA is one of the most powerful tax-sheltered accounts in the world. Any gains from XEQT inside a TFSA — dividends, capital gains, all of it — are completely tax-free, forever.

This is the strongest argument for investing instead of paying off a car loan. If your car loan is at 6% and XEQT returns 8% inside your TFSA, that full 8% is yours to keep. No tax drag. The effective spread is the full 2%, which is meaningful.

Compare that to a non-registered account where XEQT’s effective after-tax return might be 5.5-6.5%. At 6% car loan interest, the spread shrinks to almost nothing, and the guaranteed return of paying off the car loan wins.

If you have TFSA room, this changes the math in favour of investing. If you do not, it tilts toward paying off the car loan.

Canadian Car Loan Rates Are Higher

Canadian auto financing rates tend to run 0.5-1% higher than equivalent US rates. Banks of Canada has maintained a cautious rate stance, and subprime auto lending spreads remain wide. The result: more Canadians fall into the 6-8% range where payoff is the stronger move.

6. The Psychology: Peace of Mind vs the Spreadsheet

I know people who have 4% car loans and still chose to pay them off aggressively. When I showed them the math — that investing the surplus in XEQT would likely leave them thousands of dollars ahead — they shrugged and said: “I just hate having a car payment.”

You know what? I respect that.

Personal finance is personal. If the sight of that car loan on your statement makes your stomach clench every month, no spreadsheet in the world is going to fix that. The psychological value of being debt-free is real, even if it does not show up in a compound interest calculator.

Here is what I have observed:

People who should probably prioritize payoff (regardless of rate):

• You lose sleep over debt
• You tend to lifestyle-creep when you feel like you have “extra” money
• You have never invested before and the idea of market drops terrifies you
• You are carrying multiple debts and want to simplify

People who should probably prioritize investing:

• You are comfortable with market volatility
• You have a long time horizon (20+ years to retirement)
• You already have an investing habit and adding to it feels natural
• Your car loan rate is low (under 5%)
• You have unused TFSA room

The worst outcome is not picking the “wrong” strategy. The worst outcome is spending six months paralyzed between the two options, doing nothing with that extra $400/month. I have covered this in my guide on analysis paralysis and investing — overthinking is the real wealth killer.

7. What About 0% Dealer Financing?

This one is simple. If you have a legitimate 0% car loan — no hidden fees, no inflated purchase price — you should absolutely invest instead of paying it off early.

A 0% loan is free money. Every dollar you would use to pay it off early could be earning 7-8% in XEQT instead. Over 4-5 years, that is thousands of dollars in returns you would be leaving on the table by eliminating a loan that costs you nothing.

A few things to watch for with 0% deals:

• Make sure it is truly 0%. Some dealers inflate the vehicle price to compensate for the 0% financing. Compare the cash purchase price to the financed price. If the financed price is $2,000 higher, that is not really 0% — it is hidden interest.
• Do not skip payments. Most 0% deals revert to a high rate (sometimes 20%+) if you miss a payment. Set up auto-pay and do not think about it.
• Invest the surplus aggressively. Set up automatic recurring purchases of XEQT in your TFSA through Wealthsimple. Let the money work while the loan costs you nothing.

If you scored 0% financing, congratulations — this is one of the easiest financial decisions you will ever make. Make minimums on the car, invest the rest, and enjoy the spread.

8. The Decision Framework: Your Car Loan Cheat Sheet

Let us put everything together into a decision tree you can use right now.

Step 1: What is your car loan interest rate?

• 0-3% → Make minimum payments, invest surplus in XEQT (TFSA first). You are done. Enjoy the spread.
• 4-5% → Lean toward investing, especially if you have TFSA room. A 60/40 split (60% invest, 40% extra car payment) is reasonable.
• 6-7% → Lean toward the car loan. A 60/40 split (60% extra car payment, 40% invest) keeps you building the investing habit.
• 8%+ → Pay off the car loan aggressively. All surplus goes to the loan. Invest after.

Step 2: Do you have TFSA room?

• Yes → This tilts the scale toward investing, because XEQT’s full return is tax-free.
• No → This tilts toward paying off the car loan, because your investment returns will be reduced by tax.

Step 3: Do you have an emergency fund?

• No → Build a starter emergency fund ($1,000-$2,000) before doing either. Unexpected car repairs on top of a car loan with no cash buffer is a recipe for credit card debt.
• Yes → Proceed with your chosen strategy.

Step 4: Do you have other high-interest debt?

• Yes → Pay off credit cards and personal LOC first. Always. Read my complete debt vs investing guide for the full breakdown.
• No → Focus on the car loan vs XEQT decision.

9. Your Step-by-Step Action Plan

Here is exactly what to do this week:

Step 1: Find your car loan rate. Log in to your lender’s portal or check your financing agreement. Write down the exact interest rate, remaining balance, monthly payment, and months remaining.

Step 2: Check your TFSA room. Log in to your CRA My Account and look at your TFSA contribution room. If you have room, investing becomes more attractive. If your TFSA is maxed, the after-tax return in a non-registered account tilts the scale toward payoff.

Step 3: Apply the decision framework from Section 8. Match your rate to the recommendation. Be honest about your risk tolerance and sleep quality.

Step 4: Automate your decision. Whether you choose to invest, pay off the loan, or split the difference — set it up to happen automatically. Extra car payments can be scheduled through your bank. XEQT purchases can be automated through Wealthsimple’s recurring buy feature. The goal is to take willpower out of the equation.

Step 5: Set a review date. Put a reminder in your calendar for 6 months from now. Check your car loan balance and XEQT portfolio. Adjust your split if your situation has changed (raise at work, rate change, TFSA topped up).

Step 6: When the car loan is paid off — redirect everything. The day your car loan hits zero, take the full monthly payment and redirect it into XEQT. If you were paying $478/month plus $400 extra, that is $878/month flowing into your portfolio. At 8% annualized, $878/month grows to roughly $154,000 in 10 years and $540,000 in 20 years. That is the real prize.

Do not let that freed-up cash flow get absorbed by lifestyle creep. Set up the redirect before you are tempted to upgrade your car.

10. The Bottom Line

The car loan vs XEQT decision is closer than many people think. Unlike mortgages — where the long timeline and lower rates heavily favour investing — car loans have higher rates, shorter terms, and attach to a depreciating asset. That combination narrows the gap significantly.

Here is the honest summary:

• At 0-5%, investing in XEQT inside a TFSA is likely the better financial move. Make minimums on the car loan and let compound growth work.
• At 6-7%, it is genuinely close. A hybrid approach — splitting your surplus between extra payments and XEQT — is a smart middle ground.
• At 8%+, pay off the car loan first. The guaranteed return beats the uncertain one at these rates, especially over a short time horizon.
• If 0% dealer financing, invest every spare dollar. This is the easiest call in personal finance.

But here is what matters more than any of the math: pick a strategy and execute it consistently. The difference between the “optimal” choice and the “good enough” choice over a 4-year car loan is probably a few thousand dollars. The difference between doing something and doing nothing could be tens of thousands.

Whether you end up dollar-cost averaging into XEQT or aggressively attacking your car loan, you are building a stronger financial future. Future you — the one who owns their car outright and has a growing XEQT portfolio — does not care which you did first. They are just glad you started.

This guide is educational and not personalized financial advice. Consider consulting a fee-only financial planner for advice tailored to your specific situation.

Related Reading

• Pay Off Debt or Invest in XEQT? The Complete Canadian Decision Guide
• XEQT vs Paying Off Your Mortgage: Should You Invest or Pay Down Debt First?
• Emergency Fund vs Investing in Canada: A Simple Ladder
• Dollar-Cost Averaging XEQT: The Simple Strategy to Build Wealth
• How Much Should You Invest in XEQT Monthly?
• TFSA: The Complete Canadian Guide