You've finally found it: the car of your dreams. Unfortunately, with the average new car costing $36,100, it's not one you can buy out of pocket. So, now what? Unless you're willing to sell a kidney or bet your life savings at the casino, it's time to talk about car loan financing. And, we'll start with this: picking out the car should be one of the last things you do.
8 Steps to Canada Car Loan Financing
Like many things, buying a car is a process. Doing it in the wrong order can leave you underwater on your loan or staring down a repo man. Car Loans Canada has put together this step-by-step guide to ensure that won't be a problem for you. With that out of the way, let's get started:
Get Familiar with Car Loan Lingo
Like lawyers and doctors, financiers have a language of their own. By tossing around unfamiliar terms, it's possible for a banker to slide some pretty disadvantageous terms under your nose. So, it's a good idea to understand some banking terms before you start the car buying process:
- Bad Credit: This is a credit score at or below 600. If you happen to have a credit score in this range, you should read this article first.
- Bill of Sale: A document prepared by the seller that keeps track of the details of a vehicle sale.
- Cosigner: A second person who assumes responsibility for paying off a car loan.
- Debt-to-Income Ratio (DTI): A ratio expressing the percentage of a borrower's debt to their total income.
- Destination Charge: A fee charged by the manufacturer for shipping a vehicle to a dealership. This amount is often rolled into the sticker price of the vehicle.
- Invoice price: The amount a dealership pays the manufacturer for the purchase of a vehicle.
- Loan-to-Value Ratio (LTV): A number expressing the difference between a vehicle's value and the loaned amount.
- Stipulations (Stips): The documents a lender requires to finance a loan.
- Truth-In-Lending: A law that requires dealers to disclose the Annual Percentage Rate of a loan to any potential borrowers.
Figure Out What You Can Afford
Instead of finding a car and then figuring out how to pay for it, you should start by determining how big of a monthly payment you want. Then you can use a reverse payment calculator to set your ceiling. Experts recommend keeping your car payment to less than 20-percent of your gross monthly income; so, don't set your limit much higher than that.
When it comes to putting together a down payment, try and think beyond your bank account. The more cash you can put down, the better. Consider selling old furniture on Craigslist, having a yard sale, or picking up a few freelancing gigs. But, under no circumstances should you take out a second mortgage or cash out your retirement savings to buy a car. Unlike those two things, cars depreciate. So, moving money from either of those things to a car loan is just robbing you of future value.
Research Your Credit Score
Your interest rate and final payment amount are highly dependent on your credit score. If your credit is good, you can expect lower interest rates, financing discounts, and a bigger available inventory. Whether you choose to buy directly from a dealer, or through a bank, this number is vital to the buying process. In Canada, you have two free ways to find out your credit score:
- Ordering a paper copy from the Credit Bureaus: Both Equifax Canada and Transunion Canada offer free physical copies of your credit report. Ordering a report for yourself will have no impact on your credit score. Orders can be sent via fax or via telephone at 1-800-465-7166 (Equifax) or 1-800-663-9980 (Transunion). Since they only come complementary once a year, it's best to space out your requests.
- Checking a Site Like Credit Karma: While the rates displayed aren't identical to those offered by the bureau, Credit Karma can help you get a good idea of your current credit standing. Easy to use and updated daily, these free credit checkers are a fantastic way to keep track of sudden dips.
Regardless of how you get your credit report, you should always double check it for errors. Before you finance a car, make sure that all your accounts are current and out of reach of collectors. These small corrections can make a dramatic difference in your payment amount.
Compare Loan Rates Online
Use a site like Finder, The Simple Dollar, Bank Rate, or Car Loans Canada to compare car loan financing rates. These sites will also help you discover lenders familiar with your needs and credit score. Even if you end up going with dealer financing, you'll have a better idea of what a realistic interest rate looks like. Don't forget to ask whether their quoted rate is "fixed" or "variable":
- Fixed: A loan with this interest type will keep the same interest rate throughout the life of the loan.
- Variable: This type of interest rate fluctuates with the market. Avoid loans with this interest type If you can. They make it much harder to judge how much you still owe.
When it comes to securing a lower interest rate, credit unions are often the best bet. You should also check with your school or your employer to see if they have any relationships with local lenders. If you're more concerned with convenience, dealerships set the gold standard.
Gather the Documents You Need for Car Loan Financing
Lenders want assurance of both your identity and your ability to pay them back. To ensure your trip to the financing office goes smoothly, make sure you arrive with:
- Your Name
- Your Current Address
- Proof of Employment
- Proof of Income
- A Proof of Insurance
- A List of Debts
- Your Social Insurance Number
This step of car loan financing is especially important for those with poor credit. If your credit is fantastic, you'll usually get a great deal at the dealership. Apply for financing with a few lenders two weeks or so before you head to the dealership. This will force the dealership to either match or beat your quoted financing. Otherwise, you might be left with an unfavorable rate.
Keep the Term Short
Avoid opting for a five or seven-year loan. While the low payments look shiny, they're only helping one person: the lender. By upping your interest rates and dropping your monthly payment, the banker ends up with more money in their pocket. Salespeople often try to get you into more car than you can afford by stretching out the loan repayment period. To avoid falling victim to this trick, set your budget by the total price of the car and not what it'll cost you every month.
Bring a Sizable Down Payment and Pay for Extras with Cash
Experts recommend a 20-percent down payment. While this isn't possible for most of us, you should put down more than the bare minimum. Try for a couple grand at least. This will save you interest and shave months off the end of your loan. You should also finance anything that isn't part of the vehicle's price. If it's a fee, a warranty, or gap protection, buy it in cash.
Are You Ready to Drive Off In the Car of Your Dreams?
Unless you're lucky enough to secure a 0 percent or super low APR, its best to pay for your car in cash. If you end up having to rely on car loan financing, be smart about it. Stick to your budget. Come with a sizable down payment. And, of course, get quotes from a few different financiers.