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.
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:
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:
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.
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:
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.
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":
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.
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:
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.
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.
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.
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. We suggest starting with us.