Buying a brand new car is exciting. But deciding what you buy and how much you’re going to spend takes time. Budget out the cost and compare lenders to get the best deal.
How do new car loans work?
New car loans are typically secured term loans backed by your new vehicle. Generally you can borrow between 80% and 100% of your vehicle’s value and cover the rest of the cost upfront.
Once you get your funds either through a dealer or a third-party lender, you pay it back plus interest and fees in monthly installments. Usually, it takes between two and seven years to pay off a car loan. If you fall behind on your payments, your lender can repossess your vehicle.
Compare new car loans
What types of new car loans are available?
- Secured car loan. Most car loans uses the new car as collateral if you default on payments. The interest rate is typically less than what comes with an unsecured loan because there’s less risk for the lender.
- Unsecured car loan. An unsecured loan doesn’t hold the car as security. You typically need good or excellent credit to qualify for favorable unsecured rates.
- Variable rate car loan. Variable rate means that interest rates can increase or decrease according to the lending market. The variable rates can potentially be cheaper or more expensive than fixed rates.
- Fixed rate car loan. A fixed rate loan locks in an interest rate throughout the term of the loan giving you certainty that payments won’t change.
- Bad credit car loan. If your credit history has suffered a few black marks and you need a new car, you can consider a bad credit car loan. These loans often come with higher interest rates due to higher risk.
New car loans don’t have to be for brand new cars — the majority of lenders accept a vehicle up to two years old from a dealer or private sale as well.
What’s a good interest rate on a new car loan?
Anything below 5% is considered a good interest rate on a new car loan. However, you won’t be able to qualify for a good rate on a car loan unless you have good or excellent credit. In Canada, credit scores usually range from 300-900, and if your score is 650 or higher, you have a good chance of being approved for a loan. If your score is below 650, you may have trouble getting approved for a loan, and if you are approved, you will probably be charged a higher interest rate.
How to find a competitive rate on a new car loan
Here are some factors to consider when comparing loans for a new car:
- Interest rate and APR. These two rates pinpoint how competitive a loan is. The interest rate is the monthly interest you’re charged on the loan, while the APR (annual percentage rate) reflects the amount of interest you’re charged yearly on the loan, including any fees or costs associated with getting the loan. The APR shows how much interest you will have paid by the end of the loan term.
- Other fees and charges. These extra costs can include the costs of obtaining the loan as well as fees for terminating the loan early (if, say, you want to change lenders). The lender should be transparent about any fees before the agreement is finalized — always read the terms and conditions.
- Extra payments. Lenders may vary in their terms, however you may be able to repay your loan earlier without paying any fees. Be sure your loan doesn’t come with any fees for early repayment that could increase your costs overall.
- Eligibility. Before applying for a new car loan, make sure that you meet the lender’s minimum eligibility requirements. The most important requirement is usually a good credit score or at least an adequate income paired with a history of making loan payments on time and in full.
- Loan amount. You should also check the lender’s minimum and maximum loan amounts to ensure that you can get the funding you need.
Other factors to consider
- Down payment. Typically you’ll have to make a down payment of 10% or 20% of the new car’s value. Doing so can help you save in interest.
- Loan term. While it might be tempting to get a 72-month car loan, the longer your loan term, the more you’ll end up paying in interest.
- Sales tax. Make sure your lender is including the sales tax when estimating the value of your car.
Pros and cons of a new car loan
- Lets you purchase a new car without paying for it all at once
- New cars are generally easier to finance with a loan
- Can help build credit if the loan is maintained properly
- Interest rates are generally lower on new car loans
- Promotional 0% rates may apply if your credit score is high
- New cars can depreciate in value quickly
- It’s another payment to manage in your monthly budget
- If your loan isn’t large enough, you’ll need to front the rest of the cost
3 questions to ask before you get a new car loan
- What’s the final cost? It’s essential that all the costs associated with the car loan are established with the loan provider. The obvious costs are the interest rates, but there are other costs too — these may vary depending on the lender.
- What type of loan makes sense? Fixed interest rates are common with car loan companies and won’t change throughout the loan period. Variable interest rates are more uncertain, as the loan provider could adjust the interest rate at any time depending on the market.
- Can I pay the loan in full early? Early payment fees should be negotiated with the loan provider just in case the borrower’s situation changes throughout the loan period.
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