Are you in the market for a new car but don’t have enough money to pay for it outright? Like many other Canadian car buyers, you can finance the car with auto financing provided by a bank, a car dealership, online lenders, a credit union, or other financial institutions. Among Canadians, car loans are the most popular car-financing option, facilitating nearly 85 percent of all automobile purchases. Getting the best financing deal requires you to understand some basic terms and how a new car loan generally works.
Learn where to find the best auto loan rates in Canada. Our experts offer tips to help guide your search for the very best deals and rates.
How To Finance A Car
We recommend that you fully understand what you are getting yourself into before signing on the dotted line and committing yourself to years of debt. A car loan involves a formal agreement between the borrower (you) and the lender (dealership or financial institution). The lender provides a loan that covers part or all of the cost of the vehicle. In return, you agree to pay back the principal amount plus interest in regular installments within an agreed-upon period of time until the loan is paid in full.
Unlike most personal loans, which require no collateral, under the repayment terms of a car loan, the car serves as collateral throughout the repayment period. Your lender has the right to repossess the car and sell it if you default on your payments in order to try to recoup the value of the unpaid part of the loan.
How Does Financing A Car Work?
According to Natural Resources Canada, the average Canadian travels about 15,200 kilometers a year. Unless you have access to abundant and reliable public transportation, you probably need a car to get around. But a car is a major purchase, and you may not have enough cash on hand to pay for it outright. Luckily, many practical financing options are available.
An auto loan is a personal loan used to purchase a car. It is typically secured by using the vehicle itself as collateral. The lender retains formal ownership of the vehicle until the loan is fully repaid, and he can seize the car if and when you fail to make your monthly payments as required by the terms of the agreement. The interest rates on car loans are often lower than those of other personal loans because the vehicle serves as security for the loan.
A car is an expensive acquisition that can mess up your finances if you don’t plan for it properly. Your goal should be to get the best financing deal that you can qualify for. Don’t pay a single cent that you can avoid. This means shopping around, comparing quotes from different lenders, and settling for only the very best offer on the table. Sounds like a hassle. But this is what it takes to get a good car loan deal that doesn’t empty your pockets in the long run. At MoneyWizard.ca, our experts will help you conduct your comparison shopping as simply and effectively as possible.
First, keep in mind that even the nicest ride in a dealership’s lot is not an investment, not something worth breaking the bank for. In fact, by the time you finish paying off your car loan, your formerly brand-new car will have lost nearly 60 percent of its original market value. If you don’t play your cards right, you may end up with a car loan way bigger than the current value of your car. The financing tips that follow can help save you a lot of money.
1. Set A Budget.
We’d all love to drive around in the most luxurious and exotic automobiles on the market. Alas, we can’t all afford such indulgences. It is important to prepare a reasonable budget before heading out to the dealership so you can avoid going in over your head. Taking out a car loan is a big financial commitment. Don’t make it on impulse. Plan for it.
Just because you can access a good line of credit doesn’t mean that you should max it out and sign onto hefty monthly payments for a vehicle that yields no income. Your budget should scrupulously take into account every cost involved in owning, using, and maintaining the car you want to buy. In addition to payments on principal and interest, those costs include application fees, registration fees and stamp duties, insurance, routine servicing, and repairs. Make sure that your monthly car payments do not exceed 10 percent of your gross monthly income so that you have enough money to cover other expenditures like your mortgage or rent and household needs.
2. Understand Your Credit Score Before You Go To The Dealership.
Your FICO score directly affects the final purchase price of the vehicle. A three-digit number ranging from 300 to 850, this score helps lenders estimate your ability to repay your outstanding debts on time. Interest rates are a big deal in car loans and loans in general; the interest you pay on a loan is what the loan costs, and the interest rate is a major determinant of how much interest you will pay. Lenders use your credit score to determine various terms of the loan, including what interest rate that they should charge. A good credit score will help you get favorable terms.
Lenders are less than enthusiastic about giving loans to individuals who have demonstrated little commitment to promptly repaying their debts. Borrowers with poor credit scores will be offered unfavorable terms or offered no loan at all. There is no point borrowing money to buy a car if you end up paying an exorbitant amount in interest. Instead, work to improve your credit score until you can qualify for lower interest rates and other improved terms.
If you don’t have the time to improve your credit score organically, find lenders who accept co-signers. And find a co-signer with a good credit history. A co-signer agrees to cover the balance of your car loan if you fail to make your monthly repayments. He puts his name and credit reputation on the line so that you can qualify for a loan on better terms.
3. If Your Credit Isn’t Perfect, Get Financing Quotes Before You Go To The Dealer.
Only borrowers with stellar credit scores can afford to walk into a dealership without having compared their options in advance. These borrowers know that they will get the best rates that the dealership has to offer. Other borrowers may not even get a deal with the dealership in the first place. If you have only an average credit score, online lenders may give you an edge. After you complete your credit application, virtual lenders present you with the interest rate and maximum amount they can lend you given your credit score.
If your credit score is not great, the terms you are offered won’t be great either. But at least you will have an offer to consider if other options prove even more unattractive. And if the dealership or more traditional lending institutions end up giving you a better offer, you can set aside the offers from virtual lenders. To get the best deal, bring up the prearranged financing during negotiations. At CarDigest.ca, we recommend that you compare as many financing quotes as you can. Doing so will help you to improve your negotiation skills and knowledge of car-loan terms.
4. Understand How The Down Payment Affects Your Loan.
Sometimes, dealerships don’t even ask for a down payment from borrowers who have impeccable credit scores. If you are such a borrower, think twice before skipping a down payment. Although it is tempting to drive off without paying a dime in deposit, consider the long-range implications of this decision: Not putting a down payment for your vehicle has nearly the same consequences as opting for smaller monthly payments and a longer loan term. If you accept this arrangement, you could easily end up owing much more money than the car is worth. Exacerbating the disproportionate debt is the fact that your car loses approximately between 20 percent to 25 percent of its value every year for the first few years of its life span.
As a general rule, make a down payment of at least 20 percent of the vehicle’s value. You will pay lower monthly payments and a lower interest rate over the period of the loan.
5. Pay For Taxes, Fees, And Extras With Cash.
Don’t ignore the costs beyond the sticker price. These miscellaneous costs include the sales tax, registration and title fees, dealership fees, the cost of insurance, the cost of fuel, and the cost of maintenance and repair. It can all add up to thousands of dollars.
Most dealers will agree to roll some of these fees into your car loan, which obviously increases the size of the loan as the value of the car securing the loan remains constant. To avoid burdening yourself with extra costs in the long run, it is prudent to pay for these additional expenses out of pocket instead. Don’t include them in the financing.
Conclusion and Recommendation
Shopping for a car loan is more complicated than it may seem. There is so much more to consider than the information provided on an ad or promotional flyer. Always keep an eye on the details of the loan. Make sure you fully understand what you are getting yourself into before committing to the terms. Consider every available offer you can qualify for so that you don’t miss out on better offers or promotions that could save you a ton of money over the course of the loan period. If there’s anything that our wizards at MoneyWizard.ca can help with, please feel free to consult with us.
Frequently Asked Questions
1. Which is better: personal loans or car loans?
Personal loans and car loans are two of the most common financing options in the market. A personal loan can finance anything a car, a parcel of land, a vacation, a wedding, an education, an investment. Car loans are strictly meant help you buy a car. Both kinds of loan have pros and cons that you should carefully consider in light of your circumstances. Many borrowers prefer an auto loan when buying a car because it is more convenient. Qualifying for a car loan is easy, and you will pay lower interest rates because the car itself is used as collateral for the loan, making the loan low-risk enterprise for the lender. With a car loan, you skip the loan fees specific to personal loans, making the car loan cheaper.
2. How does a car loan affect your car insurance?
The cost of your car insurance may be higher if you have an auto loan because of certain requirements imposed by your lender. Because your car is held as security for the loan until the amount is fully paid off, the lender may demand that you buy physical damage coverage or collision insurance. This rider added to your basic car insurance covers your vehicle for accident damage whether or not you are at fault in the accident. This purpose is to ensure that the value of the car is preserved as much as possible if it’s in an accident. A car loan does not affect the cost per se of your car insurance, only whether you buy the insurance. You pay the same premiums as a person who buys a collision policy without being contractually required to do so.
3. Which is better: a zero percent APR or a cash rebate?
Being offered the incentive of either zero percent annual percentage rate (APR) or a cash rebate to take out a car loan can pose quite a dilemma for a Canadian borrower. Both alternatives are great, but they don’t always have the same value. You may have to crunch some numbers to figure out which option is better. To qualify for a zero percent APR, you need a good credit score. So borrowers with average or poor credit scores don’t have to wrestle with this dilemma. If you do qualify for both, though, you need to calculate the difference between what you would save with a zero percent APR and what you would save with the cash rebate. Go with the option that saves you the most money.