A reliable car, truck, or minivan can make life so much more convenient, whether that’s cutting back on your commute time, running weekend errands, or chauffeuring your kids to and from school. Then again, most vehicles, particularly new or lightly used models can get quite pricey when you factor in all the different costs involved.
If you’re planning to finance your next vehicle purchase using a loan, it’s important to have a good understanding of what your payments will be. This way you’ll be able to create a monthly budget that works for your lifestyle. Our car loan calculator can help you determine what payments you can expect to pay based on a variety of factors.
Car Loan Repayment Plans
A car loan is a type of financing that you can apply for through select lenders and dealerships across Canada. This financing exists to make a new or used vehicle more affordable over time through recurring payments with interest.
Depending on the policies of the lender you apply with, what kind of vehicle you’re looking at, and how strong your finances are, this payment plan can last several years and, when necessary, be adjusted to suit your needs.
Generally, the majority of lenders and dealerships can offer you various payment frequency options, such as:
Monthly (total payments per year = 12)
Semi-monthly (total payments per year = 24)
Weekly (total payments per year = 52)
Bi-weekly (total payments per year = 26)
Although the length, frequency, and overall cost of your plan will be arranged in advance, many lenders will also permit you to make accelerated payments so that you can pay down your debt faster through larger or more frequent installments. Just make sure you read your contract, as some lenders will charge a prepayment penalty.
Finding the Right Lender
As mentioned, there are many sources of car loans that you can choose from in Canada. Just like the car loan itself, the lender you select can have a huge impact on your financial status. If you’re looking for the best rates, vehicles, and loan conditions, it’s essential to do prior research and compare lenders in your area.
If you have strong finances, you might want to apply with a prime lender, such as a bank or credit union. Under the appropriate circumstances, prime sources will usually offer a broader selection of loan products, better rates and payment plans, and more financing.
Then again, the average prime lender can be tough to qualify with, as a car loan requires a fair amount of financing and implies a significant risk for them. To strengthen your application, it may even be a smart idea to offer some form of loan security, such as collateral or a cosigner.
If you have lower financial strength, bad credit, and no or little money to offer as a down payment, then it may be easier to apply with an alternative lender, where approval standards are less strict. This may be a private company or even one that deals specifically with bad credit clients.
Either way, your approval chances and the rate you qualify for will rely more heavily on your income and employment status. As long as you’ve had a steady job for at least a few months and are earning a sufficient wage or salary to cover your upcoming payments, there shouldn’t be a problem.
Even borrowers who have recently been discharged from a consumer proposal or bankruptcy can qualify with select alternative lenders.
That said, since they are taking on clients who technically have a higher risk of default, many subprime lenders charge higher rates. If you are going to apply with a subprime source, make sure to factor their more substantial costs into your budget.
There are also many first and second-hand dealerships that offer their own financing packages. Though the conditions of your loan will once again vary depending on where you apply and what your finances look like, applying directly through a dealership can come with certain perks, such as warranties and in-house repairs.
You may even be able to bargain with your sales representative or trade-in your current vehicle for a reduced price.
Nonetheless, a dealership must be treated like any other lender. Not only is it better to apply with good financial health, but it’s also crucial to compare several dealers so that you end up with a reputable source of financing, rates, and reliable vehicles.
The Importance of Your Credit Score
Your credit score ranges from 300-900 and represents your strength as a credit user, so many lenders will use it during their approval process when you apply for a vehicle loan. If you’re approved, your score will fluctuate according to your payment behaviour until the day that you pay off your final balance.
More often than not, lenders prefer you to have a score in the 650-900 range because it means you have ‘good credit’ and a better chance of making payments as agreed. As a result, you can secure a larger loan with a lower rate and a more adjustable financing plan. Afterward, any payments you complete will further increase your score and make you more creditworthy in the process.
However, if you miss a payment or default in some other way, the opposite will occur. Whatever the reason, enough defaulted payments can drop your score into the ‘bad credit’ range of 300-600. Once you’re here, you may only be able to access a small loan through a subprime lender, which would come with a higher rate and less negotiation power during your payment plan.
Essentially, if you‘re looking for more favourable car loan conditions when applying, it’s best to enter the application process with a credit score in the moderate to good range (anywhere above 600).
Budgeting and Affordability
No matter where you apply, keep in mind that a car loan is a significant responsibility. While most lenders can simply adjust your plan with prior discussion, there will not be much leeway if you have the tendency to default on your payments.
Defaulting on multiple payments won’t just harm your finances and credit, it could even result in your vehicle being repossessed. So, it’s once again important to prepare yourself financially. This way, you’ll have a better chance of securing a favourable loan at a low rate and affording all the associated costs.
Car loans, like all credit products, may include a few costs that range beyond your initial payments and interest rate, which is why it’s good to get a proper price quote from your lender before you apply. When selecting a lender, you can also request all these costs in writing and factor them into your budget.
For example, although a dealership warranty can be a smart thing to purchase, some packages will largely increase the overall price of your vehicle.
Thinking of getting a personal loan? Find out how much interest you’ll pay over the course of the loan with Loans Canada’s loan calculator.
Other costs that may be hidden or you may not consider include, but aren’t limited to:
Dealing with a car loan that you can’t afford is one of the fastest ways to fall into a cycle of debt, which can last a very long time if you’re not properly prepared. Since this debt can harm your finances and credit, it’s best to act quickly and resolve the situation.
Don’t worry, there are plenty of simple debt management tactics that you can try, such as:
While it’s tempting to jump into the first car that catches your eye, remember that your payments can be very difficult to manage if you’re not ready for them. There is a right and a wrong time to apply and it’s essential to know which is which.
Only consider applying for a car loan if you have:
Researched the vehicle you’re looking to finance. Have seen what various makes and models are going for, as well as how much they will cost to finance and how much value they could lose over time.
Compared lenders and dealerships in your area to find a reputable source of financing. They should have a good reputation with customers, offer reasonable rates, and possess valid business credentials.
Gotten a proper, affordable price quote. All legitimate lenders/dealerships should be willing to answer any questions you have concerning their fees/rates and must display those costs within their contracts.
Created a budget, cut down on unnecessary costs, and saved up an emergency fund. Some vehicles take years to finance, so be sure you can afford all costs throughout your payment plan, even during a period of reduced income or unemployment.
Saved for an appropriate down payment. Although a down payment isn’t always necessary, a sizeable one can reduce the length of your debt and make you more qualified for a favourable loan.
Had the vehicle inspected by your own mechanic. Though this may require a deposit, it will be worth to avoid buying something that’s unreliable or unsafe.
Looking for the Best Car Loan?
If you’re trying to finance the right vehicle, there’s no better place to go than Loans Canada. All you have to do is check out our car loan calculator above and contact us today to get driving!
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.
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.
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.
Auto dealerships are businesses that are authorized to sell new or used automobiles to consumers and serve as a direct dealer for automakers
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 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
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.
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.
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.
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.
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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