How to review and understand your car loan agreement

The average cost of a vehicle in Canada is over $30,000, and TransUnion reports that the average Canadian owes around $20,000 in car loan debt. Don’t cheat yourself by letting your lender mark up your loan with excessive fees or hidden add-ons. Instead, follow these steps to review your loan agreement to make sure you know exactly what you’re paying for.

Step 1: Check your personal and vehicle information.

It may not be the most glamorous part of buying a car, but making sure the information listed on your loan agreement is correct is critical to getting a fair deal.

Check that the vehicle identification number (VIN) matches the car you’re buying, then confirm your name and other personal information is correct. It’s easier to deal with any mistakes before you sign the contract.

Step 2: Know the fees you should be paying.

You may not be paying an origination fee for your loan, but buying a car almost always costs more than the sticker price. When you’re at the dealership, ask them flat out what fees and taxes you’ll be expected to pay. Try to get this out of the way early in the car-buying process so the salesperson will have less wiggle room to add things in later on.

Here are 3 common fees you can expect to pay:

• Sales tax. Depending on your province or territory, this could be anywhere from 5% to 15%.
• Documentation fees. Lenders and dealerships may charge this to process your loan application and draft the contract.
• Registration fees. Your dealer may take care of your provincial or territorial vehicle registration fees. If this is the case, check to make sure the fees are listed correctly on your loan agreement before signing.

Step 3: Avoid add-ons.

Dealerships are known for adding things into a contract that buyers don’t necessarily need to increase the total cost of your loan. The hope is that you won’t notice an add-on or won’t speak up about it so that you’re stuck with it. However, many of these add-ons can be purchased after you take out your loan at a much cheaper cost since you won’t be paying interest on them.

Check the section of your loan agreement where a lender can list additional products and fees. If there’s anything listed there you don’t want, don’t sign until the item is removed and your contract is adjusted to a lower amount.

Here are some common add-ons you should look out for:

• Gap insurance. Gap insurance is meant to cover the amount you still owe on your car loan if your vehicle is totaled or stolen. While it provides peace of mind for some, you can compare gap insurance policies from third-party providers instead of going with the high-cost option that’s typically offered by lenders and dealerships.
• Extended warranty. Extended warranties protect your vehicle after its factory warranty runs out. But you don’t have to buy it when you buy your car. Instead, you should purchase an extended warranty closer to when you’ll actually need it to avoid paying interest.
• Assorted add-ons. Things like anti-theft devices, additional warranties for small parts and paint protection may all be squeezed onto a loan to subtly increase your monthly payment.

Step 4: Review the math.

Review your loan agreement to ensure the numbers you’ve agreed on are actually the numbers listed on the contract. The loan balance, sales tax and registration fees should all be listed, along with any other add-ons you agreed to.

The loan term and APR should also be clearly stated. With these two numbers and the total loan amount, you can use a car loan calculator to ensure the monthly payment fits within your budget.

Step 5: Ask for clarification about unclear terms.

Along with suspicious fees, you should look out for any unclear terms. If you don’t understand something, the lender should be able to answer any questions you have. If they’re not, it could be a sign they’re trying to pull a fast one on you.

If you’ve reviewed the contract, asked questions and still aren’t comfortable signing — remember you’re never obligated to accept a loan. There are other lenders and dealerships out there, so if you’re receiving evasive answers, it’s OK to withdraw your application and look elsewhere.

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Bottom line

You may not be a lawyer, but you can save yourself a lot of money by reviewing your loan contract before you sign. And if you see something you don’t like, compare your other car loan options to find financing that offers clear terms without the risk of unwanted fees and add-ons.

Frequently asked questions

• Will I be able to cancel an extended warranty?

  Yes, you can cancel an extended car warranty and receive a prorated refund.

• How do I know if I'm being scammed?

  There are a few common car loan scams you’ll want to watch out for, like guaranteed approval, upfront fees and loan modification. Reviewing your contract and asking plenty of questions can help you avoid getting scammed by less-than-reputable lenders or dealers.