Buying a car for the first time is an overwhelming experience for most Canadians. There are so many things that need to be considered that often, important factors like loan terms can fall by the wayside. It’s important that regardless of how stressful you may find the car buying process to be, you need understand the importance of getting the right loan terms for you. This requires doing research and asking yourself questions about your financial situation. In this article, we’re going to go over 8 tips to get a great deal on your first car loan.
1. Decide on a Realistic Budget
The biggest decision you need to make when buying a car is how much you’re able to afford. This means calculating what you’re willing/able to pay monthly as well as the total cost of the vehicle. You should be calculating more tha just the cost of the loan, you also need to consider the cost of ownership. This means incorporating the expected cost of maintenance, fuel and insurance.
Most experts recommend not exceeding 10% of your income on a car. The best way to calculate your budget and the costs of owning a car is by using a car loan calculator. Mess around with different scenarios and see what repayment plan, interest rate and down payment make the most sense for you.
2. Longer Terms Cost You More
When you’re messing with financing options, it’s easily to be fooled by that monthly payment. As you extend the length of your loan term, your monthly payment will decrease. The problem with this is that as your monthly payments are lower, due to the extended loan term, you’ll end up paying much more in interest. While it may make sense for you to extend your loan a bit and pay more in interest to make your payments more feasible, we recommend keeping your term as short as possible.
3. Review Your Credit Score
Your credit score is the biggest factor in determining your interest rate on your car loan. If you’re going to get a low interest rate, you’re going to need to have a good credit score with lengthy credit history. If you don’t have much credit history, you’ll have a hard time finding a low interest rate loan and may need to use dealer financing which often means paying more in interest. Ideally, if you’re in a position to wait on buying a car and take time to build your credit score/history, you’ll likely end up with a much more favorable loan term when you decide to buy.
4. Get Pre-Approved for a Loan
When you get pre-approved for a car loan, the lender creates a soft-hit inquiry that won’t negatively affect your credit score. You’ll be able to visit as many dealerships as you want, test drive all the vehicles you’d like without the stress of knowing whether or not you’ll be approved for the desired vehicle. Another advantage of getting pre-approved is that it gives you leverage during the negotiation process.
5. Decide on a New or Used Vehicle
Lenders offer different rates depending on if the vehicle you’re looking to finance is new, used or leased. Typically, buying a new vehicle will mean you’ll get a better rate, but this doesn’t show the full picture. New vehicles also cost more and depreciate faster than used vehicles. So while you may end up paying more interest on a used car, overall it could be cheaper than buying a new vehicle.
6. Use a Co-Signer
If you don’t have a great credit score or much credit history, using a co-signer is a great option to get yourself approved for a car loan. The lender will look at both your credit score and the co-signers credit score in order to determine your rate. A co-signer is essentially collateral for your car loan in case you fail to make payments. In this case, the lender would seek the missed/remaining payments from the cosigner. For this reason, it’s critical that you don’t put anyone in this position and only find a co-signer if you’re confident you can manage the loan in its entirety.
7. Make a Big Down Payment
Once you know how much you’re willing to spend on the vehicle, you need to consider how much of a down payment you’re going to make. Most experts recommend making a down payment that’s at least 15% of the overall cost of the vehicle, but we understand this isn’t always possible. It’s smart to refer to a car loan calculator throughout this process so don’t hesitate to see how different down payment amounts will affect your monthly payments.
8. Research Manufacturer Specials
Many manufacturers today offer special deals for first time car buyers or college students. If you have the money and credit score to buy a new car, it may make sense for you to try and take advantage of one of these first time car buyer deals.