Buying your first car is exciting, but these purchases are expensive. Thankfully, car loans help make car ownership more accessible to consumers, especially those buying their first car. The thing is, navigating the car loan process can be daunting, but understanding car loans is important for first-time buyers to make informed decisions. Let’s take a closer look at car loans for first time buyers to help you know everything there is to know.
Key Points
- Car loans make car buying more accessible for those without the capital to purchase a vehicle in full.
- First time car buyers are encouraged to find out as much as possible about car loans, including costs and terms.
- Car loans are available from banks, credit unions, dealerships, and online lenders.
- Alternative options may also be available to help cover the cost of a vehicle purchase, including personal loans and leases.
Understanding Car Loans
A car loan helps you purchase a vehicle by borrowing money to cover the purchase price and repaying it over a set term with interest. Here are the key components of car loans:
- Principal: The amount borrowed to purchase the vehicle.
- Interest Rate: The cost of borrowing, represented as a percentage.
- Loan Term: The length of time you have to pay back the loan, which can range anywhere from 36 to 72 months, on average.
- Monthly Payment: The amount you pay every month to repay the loan, which includes both the principal and interest.
- Collateral: Your car secures the loan, which reduces the lender’s risk. It’s important to note that if you default on the loan, the lender may have the right to repossess the vehicle.
Where To Get A Car Loan
First-time car buyers can get financing for their vehicle purchase from the following sources:
- Banks: These traditional lenders offer their clients competitive rates, particularly for those with good credit.
- Credit Unions: If you’re a member of a credit union, you may be offered a car loan deal. Credit unions offer their members competitive interest rates and flexible terms for car loans, as well as more personalized service and better rates compared to a traditional bank.
- Dealership In-House Financing: For more convenience, you may consider applying for a car loan directly with the dealership you’re buying from. Keep in mind, though, that this convenience may come with higher interest rates.
- Online Lenders: For the ultimate convenience, you can apply for a car loan online from a variety of online lenders. They typically provide quick approvals, though rates may be higher, especially if you’re applying with bad credit.
What Do You Need To Qualify For A Car Loan?
To qualify for a car loan, you’ll typically need to meet the following criteria:
- Credit Score: A good credit score (typically at least 660) shows your creditworthiness and ability to pay back the loan.
- Income: A stable and sufficient income is needed to ensure you’re able to cover your monthly payments.
- Employment History: Having a stable and reliable job is a typical requirement and reduces the lender’s risk.
- Debt-To-Income (DTI) Ratio: Your DTI ratio is a representation of how much of your income is currently going towards current financial obligations. A lower DTI ratio shows that you’ll have enough money left over to cover additional car loan payments.
- Down Payment: While not always necessary, a down payment can reduce the loan amount and the lender’s risk.
- Proof Of Identity: You’ll need to provide the lender with a valid photo ID, such as a driver’s license or passport.
Documents Required For A Car Loan:
Along with a completed loan application form, you’ll need to supply the lender with documentation to support your application, such as the following:
- Pay stubs, tax returns, or bank statements to verify your income
- Driver’s license or passport to verify your identity
- Information about any outstanding debt
- Vehicle details, including make, model, safety rating and year
Steps To Get A Car Loan
To apply for a car loan, follow these steps:
Step 1: Research Loan Options
Compare interest rates, loan terms, and fees from several lenders. This will show you where you can get the best deal based on your financial profile. You can quickly compare lenders using Loans Canada’s CompareHub tool.
Step 2: Get Preapproved
Preapproval can give you an idea of your likelihood of loan approval, as well as how much you can borrow and the rate you may be offered. Getting pre-approved can also expedite the car-buying process.
Step 3: Shop For A Vehicle
Keeping your budget in mind, shop around for a vehicle that suits your needs and affordability.
Step 4: Finalize The Car Loan
Once you’ve found the vehicle you want to buy, review the lender’s loan terms and make sure you fully understand all costs.
Financing Features To Consider
Before applying for a car loan as a first-time car buyer, consider the following factors:
APR (Annual Percentage Rate)
The interest rate is a key factor to consider as mentioned. But it’s more important to consider the APR. This represents the loan’s total cost, as it is inclusive of all costs associated with the loan, including rates and fees. For example, a loan with no interest and high fees might have a higher APR than a loan with high interest, but no fees.
Learn more: Understanding APR Vs AIR
Short Vs Long Loan Term
The length of the loan term is also important to consider:
| Short-Term Loans | Long-Term Loans | |
| Monthly Payments | Higher monthly payments | Lower monthly payments |
| Total Interest | Less interest paid over the life of the loan | More interest paid over the life of the loan |
| Financial Commitment | Loan is paid off sooner | Loan takes longer to repay |
Promotions And Sales
Make sure you do your research on multiple lenders and dealerships and check their websites frequently for promotions and sales.
Down Payment Amount
Although some lenders offer loans that don’t require a down payment, these financing options often come with higher interest rates and higher monthly payments. Consider saving for a little bit longer to secure a bigger down payment for your loan. In the long run, this will keep your monthly payments lower.
Monthly Budget
Examine your bank and credit card statements with great detail to get an idea about your spending each month. By subtracting this amount from your monthly income, you’ll get an accurate range of how much you can afford to pay in monthly car payments.
Alternative Car Financing Options Available For First Time Buyers
In addition to traditional car loans, you may be able to access the funds needed to make this big purchase with other loan types, such as the following:
Secured Personal Loan
If you aren’t comfortable using your car as security for the loan, you might want to consider a secured personal loan. With this kind of loan, you are able to use other assets as security instead of the car.
Some examples of security, or collateral, that can be used are expensive artwork and jewellery, equity in a house, or savings and investment accounts. Rates are also often reasonable with secured personal loans, and the terms are flexible since the lender has tangible security on the loan. Furthermore, you are able to borrow as much as your collateral is worth, which can sometimes be more than the value of your car.
Learn more: Loans With Collateral
Unsecured Personal Loan
An unsecured personal loan is one that does not require a valuable asset to back the loan. This may be an attractive option because you don’t have to risk any of your assets as security in exchange for borrowing. However, you often need to have a high credit score for a lender to trust you enough to give you an unsecured personal loan.
Keep in mind that interest rates are often higher with unsecured loans compared to secured personal loans and car loans.
Cosigner
As a first time buyer, you may not be established enough to have a high credit rating or enough capital or assets to use as collateral. Having a cosigner, such as a parent or more established adult, can help improve your chance to be approved for a car loan. A cosigner can improve your chance of obtaining a more competitive interest rate as well.
A cosigner promises to take over loan payments if you are unable to pay. This reduces the lender’s risk and may help increase your chances of loan approval.
Leasing
Leasing gives you the opportunity to drive a new car with lower monthly payments, but you won’t actually own the vehicle. This option may be suitable for those who prefer driving new cars every few years and don’t mind not owning the vehicle.
Best Car Financing Providers in Canada
Tips For First Time Car Buyers
Keep the following tips in mind when heading to the dealership to buy a car:
Negotiate
When buying your first car, consider negotiating the price. Make sure that you’re negotiating the total price rather than the cost of monthly payments. Dealers might try to sell you on a deal with lower car payments, but a higher total price overall.
Do Your Research
Make sure you research plenty of car options before making a decision. Researching can help you decide if you want a used or new car, the type of model that you’d like, and the price.
Used Or New
If you’re on a tighter budget, you might consider a used car. Before buying a used car, however, make sure to obtain a vehicle history report so that you’re aware of any accidents or incidents that the car has experienced. You might also consider having a mechanic inspect the vehicle.
Model And Features
When deciding on your car model and features, you should first consider why you are purchasing a car. Are you a commuter? You may want a car that’s fuel-efficient or one that retains a high trade-in value. Do you have kids? You may need to consider a minivan. Will you be transporting a lot of cargo? You might need a car that can carry more weight.
These are all factors that can help you determine what kind of car is best for you.
Budget Accordingly
Before buying your first car, it’s important to have at least an idea of how much you want to spend per month, and over the course of the loan term. However, don’t just budget for the cost of monthly loan payments. You’ll need to consider the costs of maintenance and repairs, car insurance, registration fees, license plate renewal costs, and fuel.
Final Thoughts
Securing a car loan as a first-time buyer may seem overwhelming, but with some homework and careful planning, it can be manageable. By understanding your financial situation and comparing lenders, you should be able to finance your first car and take advantage of the freedom that comes with it.
