How Much Does Financing a New Car Cost?

How Much Does Financing a New Car Cost?

Written by Bryan Daly
Fact-checked by Caitlin Wood
Last Updated November 6, 2020

There are plenty of reasons to buy a new car, especially in Canada, where weather conditions can change at the drop of a hat and certain locations are beyond the reach of public transit, taxis, or Uber rides. The only problem is that a new car can also be very expensive in the short and long term. In fact, it often requires a loan to finance entirely.

However, before you apply for new car financing, it’s extremely important to find out how much extra your loan repayment plan, interest rate and fees could cost you, both immediately and in the years to come. 

Where Can You Finance a New Car?

When looking for new cars in your area, it’s also essential to do lots of research and consider all factors. For instance, there are a few different sources of vehicle financing that you can apply for and each of them has its own set of benefits and drawbacks.

Banks & Credit Unions

The first place that many drivers go to apply for new car financing is their bank or credit union. After all, the familiarity alone can make the loan application process much less nerve-racking and some longtime clients may even get preferred treatment. Not to mention, there’s the added security that comes from a well established financial business.

Banks and credit unions will typically transfer the loan directly to the dealership you’re purchasing the vehicle from. 

All this said, it can be tough to qualify with a bank or credit union because of their tighter borrowing restrictions. You will usually need a solid income, a high credit score and possibly some assets for collateral to secure a sufficiently sized loan with a good rate.

Auto Dealerships 

Despite the affordability and security of banks and credit unions, plenty of drivers would rather apply for in-house financing with their local car dealer and save themselves the trouble of applying for a loan through a third-party lender. Actually, some dealerships offer better incentives than financial institutions (especially for new cars), such as 0% interest for the first few months, easier approval restrictions and more negotiability.

The biggest drawback of financing a new car through an auto dealership is that the interest rates (after any incentives expire) may not be as low as those of a financial institution. Plus, there’s always the chance of ending up with a longer, more expensive payment plan, particularly if you’re not a preferred client with solid finances and credit.

Alternative Lenders

If your bank, credit union, or auto dealer doesn’t approve you for new car financing, there are also many private lending companies (physical and online) that offer car loans. The main benefit of applying with an alternative lender is that it’s usually much easier to qualify, even if you have a low income or bad credit. Plus, you probably won’t have to offer a down payment or loan security.   

For the most part, the approval and payment processes are similar to that of a financial institution; a lump sum of liquid money deposited into your bank account, which you would use to buy your car and repay in installments over several months/years. Some alternative lenders can even pay your chosen dealership directly. 

Unfortunately, most alternative lenders charge higher interest rates and fees. Loans may also be smaller and have more restrictive payment plans because their clients often have more risk of default. Additionally, there are fewer guarantees and regulations with private companies. If you’re not careful to apply with a legitimate lender, you could get a subpar loan with a predatory rate or scammed out of your money.  

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What Are the Pros and Cons of Financing a New Car?

Overall, there are tons of reasons to finance a new car instead of a used model (and vice versa). Let’s take a look at some of the main benefits and drawbacks of financing a new car so you can figure out if it’s the right option for you: 

Pros

  • Positive Equity – If the resale value of your car outweighs the amount of money you’ve invested, it means you’ve built positive equity. As such, the car becomes an asset that you can use as collateral to secure another loan, for example, a personal loan.
  • Repairs & Maintenance – If you buy a solid new car from a reputable source, you shouldn’t have to deal with any unexpected maintenance issues for a long time. Plus, many basic repairs will be covered by your warranty (if you buy one).
  • Features & Incentives – As mentioned, applying with the right dealership can lead to many perks, such as 0% interest for the first few months, better interior or exterior features for your car, and a more negotiable repayment plan. 
  • Ownership Benefits – Remember, once all your payments are made, you will own your car and can therefore use it as collateral or resell it someday. Unlike with a lease, you can also drive the car as hard and as far as you want.

Cons

  • Cost – Any new car can be expensive to finance, especially with dealership fees and interest factored in. Your payments will probably be much higher than those associated with financing a used car. Plus, new cars are typically pricier to insure and license. 
  • Negative Equity – Most new cars also depreciate rapidly, losing around 20% of their value almost immediately and an additional 10% every year afterward. If you pay more for the car than it’s worth, you’ll end up with negative equity.
  • Qualifying – Although there are plenty of lenders and dealers that will approve you, even if you have bad credit or unhealthy finances, it can still be much harder and more expensive to qualify for new car financing than used car financing. 
  • Wear & Tear – Unlike an older vehicle, every scratch, dent and bit of rust your new car accumulates is not only bothersome to look at, it further decreases its resale value and could result in more expensive maintenance problems.
New vs. Used Cars

What Factors Affect the Costs of Financing a New Car?

While it can be more expensive than buying a used car, there are several ways you can make a new car less costly. To give you a better idea of how that’s done, here are some of the major factors that affect the cost of financing a new car:

  • Loan Amount – Every lender and auto dealership has different approval standards, fees and rates. Generally speaking, however, the larger your loan debt is, the riskier you’re considered, so you’ll often be charged more interest. 
  • Annual Percentage Rate – Your APR can drastically affect the amount of interest you pay over the life of your car loan. Usually, if you have a strong income and credit score, you’ll be more likely to qualify for a lower APR.
  • Term Length – In this case, a shorter repayment plan will normally result in a higher APR and loan installments, so the lender/dealer can maximize their profits. However, you will pay more interest overall with a longer-term.

Here’s a table that shows a basic cost comparison between the average short and long term new car financing term:

36 Months (3 Years)84 Months (7 Years)
Car Loan Amount$35,000$35,000
Interest Rate6.99% APR4.99% APR
Monthly Payment$1,081 ($498 bi-weekly)$660 ($304 bi-weekly)
Total Interest Paid $7,339.50$12,225.50

What Additional Factors Can Affect the Cost of Financing a New Car?

The example above only lists the primary costs that you could encounter during a common new car financing term. There are actually a few other factors that can increase or decrease the cost of your repayment plan, including but not limited to: 

  • Down Payment – If you offer a large down payment on your new car, it can significantly decrease the length of your debt, as well as the amount of interest you’ll end up paying for your financing term. Most vehicle experts recommend a down payment of at least 20% of the vehicle’s final price for the best results. 
  • Income & Debts – The healthier your income and debt levels are, the easier it is to qualify for a large car loan, a low-interest rate and a good payment term. While you can qualify with a subprime lender/dealer if you have a weak or inconsistent income and existing debt problems, your financing plan will be more expensive.   
  • Credit Score – Ranging from 300 – 900, your credit score shows the lender or dealer how you’ve handled your past credit products. If you have a bad credit score range (300 – 600), it could mean you’ve defaulted on debts in the past and you’re a riskier client. The lower your score is, the higher your interest rate will be.
  • Trade-Ins – If your current vehicle still has some resale value, you may be able to trade it in at your dealership in exchange for a reduced price on your new car. While you probably won’t get what your car is truly worth out of the trade, it’s still a good way to pay less interest during your new car financing term. 
  • Sales Tax – Another thing you need to consider is the GST (Goods & Sales Tax), HST (Harmonized Sales Tax) and/or PST (Provincial Sales Tax) that your dealer charges. However, certain sales taxes are only applicable to specific provinces. For instance, GST is the only type of sales tax you’ll encounter in Alberta. 
  • Payment Frequency – While your individual payments will technically be smaller with a weekly or bi-weekly plan, you’ll have to make them more frequently. Some buyers want a bi-weekly schedule since it lines up better with their paychecks. Others prefer monthly payments because they give the driver more time to save.

Thinking About Financing a New Car?

If so, doing research, comparing the potential costs and having strong finances are some of the best ways to qualify for a large loan with an affordable rate and repayment term. While financing a new car can cost a bundle, the reliability and convenience that you get out of the deal are usually worth the effort. For help finding new car financing in your area, Loans Canada is always around.

Car Loan Glossary

Terms
Add-Ons

Any features or services that are applied on top of the base price of a car are considered add-ons. These can include things such as tinted windows, heated seats, leather seats, alarms, and wheel locks, to name a few.

Base Price

The base price of a car is the cost of the vehicle without any upgrades or added features that can be added after the car is ordered from a dealership. Only standard equipment and the manufacturer’s warranty are included in the base price, but any other fees will be added afterward.

Certified Pre-Owned (CPO)

CPO cars refer to used cars that have been certified, either by the dealership selling the car or the manufacturer of the vehicle. This gives consumers confidence knowing they are buying a used vehicle that is in good condition. When a used car is obtained by a dealership, it is inspected by a certified mechanic. The car is then repaired if it meets the required standards and is then ready to be sold as a CPO vehicle.

Clear Title

A clear title means that the owner of the car has a free and clear title and no longer carries a balance owing on a car loan. There are no liens of the title or levies from creditors.

Dealership

Auto dealerships are businesses that are authorized to sell new or used automobiles to consumers and serve as a direct dealer for automakers

Dealership Financing

Consumers can obtain dealer financing to help fund the purchase of a vehicle. A contract is signed with a dealership that requires a consumer to pay for a specific amount plus interest and funding fees over a certain period of time. Dealers will send the details of the consumer’s financials to various lenders to find one that will approve the loan.

Depreciation

Depreciation refers to the decline in the value of a vehicle. Immediately after purchase, a vehicle will become less valuable as soon as it is used. Put another way, depreciation is the rate at which an automobile loses its value over time

Extended Warranty

Vehicles come with a manufacturer’s warranty when purchased, but buyers can choose to purchase an extended warranty. This serves as a form of insurance policy on the vehicle to cover the cost of potential repairs in the future. An extended warranty is usually good for a certain period of time and/or mileage.

Lease

A contract that allows an individual the right to use or occupy a property for a specified period of time in exchange for a monthly payment. Leases are common for a property like apartments and vehicles. The individual on the lease does not own the asset at the end of the lease’s term, it is strictly for rental purposes.

MSRP (Manufacturer’s Suggested Retail Price)

Car manufacturers will offer recommendations on how much a car should be priced at the retail level, known as the manufacturer’s suggested retail price, or MSRP. The purpose of the MSRP is to standardize pricing in the automobile industry so that there is not a lot of fluctuation in price from one dealership to another.

Title Loan

A title loan uses the vehicle title as a form of collateral to secure a loan. Borrowers must own their vehicles free and clear and no longer owe any amount on a car loan. A lender will place a lien on the car title in exchange for funds. If the borrower defaults on the loan, the lender can take possession of the vehicle and sell it to cover any losses.

Trade-in Allowance

A trade-in allowance is the amount that a car dealer will reduce the cost of a new car purchase by after the consumer’s old vehicle has been traded in. It is somewhat like being given credit from the sale of an existing vehicle that is then applied to the purchase of a new vehicle.

Trade-in Value

A trade-in value is the amount that dealerships offer consumers for their vehicle and is typically applied toward the purchase price of another vehicle. Dealerships will assess the value of the vehicle and will base the amount that can be applied to a new car purchase. The consumer will then trade in the old vehicle and the assessed value amount will be deducted from the price of another vehicle. Trade-in value is often different than what the vehicle may be worth when sold in the open market.

Vehicle Identification Number (VIN)

Every vehicle will have its own unique vehicle identification number, which is used to identify a specific vehicle. No two vehicles will have the same VIN, making them easily identifiable with this unique 17-character code.


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Bryan is a graduate of Dawson College and Concordia University. He has been writing for Loans Canada for five years, covering all things related to personal finance, and aims to pursue the craft of professional writing for many years to come. In his spare time, he maintains a passion for editing, writing screenplays, staying fit, and traveling the world in search of the coolest sights our planet has to offer. Bryan uses the BMO Cash Back Mastercard to earn cash back on everything from boring bill payments to exciting excursions. He is also a strong saver, holding both a TFSA and an RRSP account in order to prepare for his future while taking full advantage of tax benefits.

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