When you have your eye on a car, it’s easy to consider everything but the financing. However, knowing your options for buying, leasing or even refinancing your dream car can get you out on the road more quickly – and leave you with more money in your pocket.
What kind of car do you want? Can you afford to buy a new or used car? Do you even want to buy a car – or do you just want to lease one for a few years?
There isn’t just one type of car loan out there for one kind of driver. The financing you need depends on your personal finances as well as what you’re hoping to get out of your loan. Most auto financing relies on securing your loan with the vehicle you intend to buy or refinance.
Most lenders offer a combination of the following types of lending:
Used car loans. Similar to financing for a new car, used car loans loans factor in the kilometres and age on your previously-owned car when determining your interest rate and loan term.
Private-party car loans. These term loans from lenders allow you to buy a car from a private seller, rather than a dealership.
Lease buyouts. This financing allows you to pay for the fee at the end of your already leased car, so that you can purchase it outright.
Auto refinancing. Trade in your existing car loan to reduce your monthly payments or pay it off more quickly.
Buy-here-pay-here loans. This last-ditch option helps people with poor credit avoid a hard pull on their credit report by financing their car directly through a dealership – but often with high interest rates and hidden add-ons.
How much do car loans cost?
When it comes to how much you’ll pay for your car loan, it ultimately comes down to 3 main factors:
Interest rate. This is a percentage of your loan balance charged by your bank or lender and added to the principal amount you owe. Interest rates for car loans vary greatly, with rates as low as 0.99% to 12% or higher.
Fees. Fixed charges added on to the cost of your car loan that you pay back along with the rest of your loan. Your loan’s APR is its annual fees and interest rate expressed as a percentage.
Loan term. The amount of time your loan contract gives you to pay off your loan. A short loan term generally results in higher monthly payments but a lower total loan cost, since you will pay less in interest. If you can afford to make higher repayments each month you should, in order to save money. APR is critical in calculating how much you’ll pay for your car loan, true. But finding a loan term that isn’t too long or too short also affects your overall costs.
The longer your car loan term, the more you’ll pay in interest, which ultimately means your car just got a lot more expensive.
After your APR and loan term, you’ll want to pay attention to how much you’ll have to pay up front and in taxes – and ask about any rebates you might be eligible for. Remember to factor in:
Down payment. How much you’re expected to put down initially will affect the immediate cost of your car loan. Expect to pay about 10-20% of the cost of your vehicle up front. Some dealerships offer $0 down, however you can usually expect to pay large monthly payments with this type of deal.
Sales tax. Sales tax differs between different provinces and territories, so contact Service Canada to find out more about the tax you should expect to pay. Make sure to factor in sales taxes when estimating the cost of your car, as this can add a hefty amount onto the cost, usually between 13-15%.
Rebates. If you’re financing with a dealer, ask about any cash back discounts to avoid leaving money on the table. 3 main types include cash rebates, low-interest dealership financing and special leases. Government rebates for low-emission or hybrid vehicles are also available in most provinces and territories.
You’ll need to meet tough credit and income standards to qualify – only around 10% of applicants actually qualify for the 0% rate. But it might not be worth it even if you do make it past the credit check. These loans tend to be shorter, often no more than 36 months, translating into high monthly repayments.
You also won’t have as much room to negotiate the price and won’t qualify for a cash-back rebate. On top of this, your deal might be cancelled if you miss just one payment. In the end, you could wind up paying just as much, if not more, if you went for a car loan with interest plus higher monthly repayments.
How to find the best car loan
Before you compare lenders for car loans, calculate how much you can afford to pay for a down payment, monthly repayments, any fees and your loan’s overall cost. Look up the taxes and fees associated with purchasing a car in your province or territory, and add them to the cost of each car you consider.
Banks, credit unions and online lenders often ask borrowers to choose a car before applying. Matching services and dealerships, on the other hand, usually ask you to come with an open mind. Regardless of where you apply, narrow down the makes and models of different cars in order to get an idea of the type of car you can afford.
To get the best car loan, ask yourself these 9 questions:
Click on each question to expand more information about what to look for.
There’s no point in applying for a loan if you don’t meet the lender’s minimum eligibility requirements. You can find these requirements on the lender’s website or in online reviews.
Does the lender offer loans that cover the total cost of a car you’re interested in, and that you can afford? Don’t be convinced by a dealer that you can upgrade models if you know it’s out of your budget.
A high minimum advertised interest rate isn’t the best sign, and a refusal to disclose interest rates can be even worse. It could mean that the rates are so high, the lenders would rather not advertise them.
On top of dealership fees and taxes associated with buying a car, some lenders charge fees for taking out a loan.
Does your lender offer terms you can afford after you factor in APR and other costs involved in getting a new car?
A 10% down payment is standard, but some lenders charge more. Go for a lender that offers a down payment that fits your budget.
For those leaning toward leasing a car, remember that the value of your car decreases over time. There’s a chance that leasing that car will cost more than just buying it if you’re in it for the long term. It’s usually cheaper to buy a car. However, one of the differences between buying and leasing a car is that, as a lessee, you don’t have to worry as much about maintenance and vehicle upkeep.
Quickly scan online forums and review sites to see what people say about each lender. Are interest rates high? Do people have trouble making repayments? Is there poor customer service? Common issues with a certain model? If anything sounds sneaky, run.
Some lenders hold your hand throughout the process of getting financing, and others don’t. Consider the help if you don’t know what you’re doing – but also ask: Is the lender genuinely helpful or just pushing you into spending lots of money?
You’ll find that some of this information isn’t readily available online for loan-matching services and dealerships. In those cases, it’s worth taking a look at reviews, forums or calling a customer service line to get a ballpark answer.
4 red flags when looking for financing
Lenders or dealerships advertising any of these three “perks” should ring the alarm bells – or at least prompt deeper research.
There’s no credit check. Dealerships often don’t run a credit check for buy-here-pay-here loans, but other types of loan usually require a credit check. Direct lenders advertising no credit check could be a scam.
It lets you take your car home before approval. This could be the sign of a “spot delivery scam,” where a dealer calls a few days later to announce that financing fell through and you now need to renegotiate your loan at a much higher price.
It lies about your credit score. Some dealerships con borrowers into paying higher interest by telling them their credit score is worse than it actually is. Yet another reason to check your credit report, and know what that number means, before comparing lenders.
It offers 0% financing. You may not pay an APR on your car loan, but you typically aren’t able to negotiate your price or take advantage of rebates. Loan terms also tend to be shorter, sometimes to the point of being unaffordable. Be very careful with this option, as it’s usually offered quite frequently.
The car loan application process can vary wildly depending on the type of financing you choose. Getting financing from a dealership doesn’t involve most of the steps outlined below, for example – instead, you start at the dealership.
Go to your lender’s website or physical store and follow the steps to pre-approval. This typically involves a soft credit pull and can take anywhere from a few seconds to a few days.
Depending on what type of lender you’re borrowing from, you might need to have a specific car in mind to qualify. Others will just want to know how much you’re willing to spend, including taxes and fees. Regardless of which choice you choose, go in with a specific number in mind.
Your lender will tell you the type of loan you stand to get once you’re preapproved. Some lenders also guide you toward vehicles you can qualify for at this point. Carefully consider your finances to make sure you can afford your loan before taking the next step.
At this point, your lender might ask to see documents to verify your income, insurance and more. Online lenders typically allow you to upload forms and documents as PDFs.
You typically need to sign off on your loan before going to the dealership, but that’s not always the case. Regardless, read the terms and conditions with extra care, and look up anything you don’t understand. Never skim a loan contract – always read it thoroughly.
You must find insurance before purchasing a car. While your dealership (and some lenders) can offer insurance, you won’t necessarily get the best deal through them.
See if your lender can set up an appointment for you. Otherwise, go to the dealership and tell the salesperson who you’re financing with. Then, pick out a car you can afford.
Most lenders ask to see at least three documents when you apply for a car loan:
Your driver’s licence. Your lender might ask to see your licence or require your licence number. Either way, have it on hand.
Your insurance card. Some lenders require you to have specific car insurance before applying for a loan.
Employment verification. You might be asked to submit tax returns or recent pay stubs to prove you make enough to afford your car loan.
Bad credit. The pre-approval process for many lenders is a soft credit check only. How to avoid it: Know your credit score and your lender’s credit requirements before applying.
Paperwork mistakes. Missing or incorrect information on your application can land you in the rejection pile. How to avoid it: Carefully review your application before submitting it. Bonus points if you get someone else to look it over too.
A recent financial catastrophe. Foreclosure, tax liens and bankruptcies make you look like a risk to lenders. How to avoid it: Wait a year or so before all of that is behind you. Waiting not an option? Try a lender that doesn’t have such strict requirements, though it might cost you in higher repayments.
You asked for too much. You can be rejected if your lender doesn’t believe you’re able to repay a loan. How to avoid it: Only apply for a car loan you can prove you can afford – not one you think you can.
Inconsistent income. Unpredictable cash flow is not assuring to a lender that wants to be sure you can pay back a loan. How to avoid it: Freelancers might try to get a steady part-time gig on the books to show you have at least a reliable base income.
So, you’ve finalized the deal that got you behind the driver’s seat. Now it’s time to start paying off your car loan. With many lenders, you can set up automatic payments so you don’t forget to pay. Keep track of your personal account and loan balance to make sure everything goes smoothly.
How easy it is to get approved for a car loan depends on several factors. These include your creditworthiness, your income and how much you can afford to pay for a down payment. If you have strong credit and enough disposable income to afford a down payment plus monthly repayments, getting approved isn’t difficult.
The state of the economy can affect how easy it is to get a car loan. If the economy is doing poorly and you work in an industry that’s experiencing a lot of lay offs, lenders might be more cautious about giving you a car loan. On the flip side, if the economy is doing well, lenders are typically less concerned about you losing your job and could be more willing to approve you with favourable rates.
What makes a good APR depends on your personal credit score. If you have excellent credit, a good APR could be 0.99% to 4% on a used car loan. If you have poor credit, the lowest APR you may be eligible for could be around 12%, or much higher. It all depends on your creditworthiness and your options.
Usually, you will need to be a Canadian citizen or a permanent resident. However landed immigrants can sometimes be approved for car loans. Having a valid Canadian address will likely be the most important factor.
This depends on the lender you are applying with. Check the requirements of the loan before you apply.
Leasing a car can be an option to consider if you’re looking for a newer model car every two or so years – just remember you will never have ownership of this vehicle. Repayments will generally be lower on lease agreements but they are harder to get out of than just selling a car under finance, so you need to be sure you’ll want the car for the next two years. Learn more with our buying vs leasing a car guide here.
Typically, 0% financing is only available to borrowers with excellent credit scores – between 800 and 900. Dealers typically also consider aspects of your personal finances like your income and debt-to-income ratio when deciding your interest rate.
Aliyyah Camp is a writer and personal finance blogger who helps readers compare personal, student, car and business loans. Aliyyah earned a BA in communication from the University of Pennsylvania and is based in New York, where she enjoys movies and running outdoors.
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