Car Deal Canada

Choosing The Best Car Loan

Choosing The Best Car Loan

Purchasing a new or used car is one of the largest financial decisions many people will make. With the average price of a new vehicle now over $47,000 in Canada, financing makes buying possible for most buyers by spreading out payments over months or years.


Getting a car loan seems straightforward – visit a bank or dealership and drive away with monthly payments. But not all auto loans are created equal. The lender you choose and specifics of the loan can have huge impacts on your finances over years of payments. Taking time to find the optimal financing offer saves thousands of dollars while avoiding headaches and surprises.


Navigating the maze of auto loan options to find the best rate and terms requires research and comparison shopping. This comprehensive guide takes you through the entire process to confidently make the smartest loan decision for your situation. We’ll explore setting a budget, checking credit, loan types, lender options, down payments, total costs, fine print and more.


Whether your credit score is excellent or poor, this advice helps you gain control of the car buying journey. Drive off with peace of mind by using this roadmap to secure favorable financing terms on your next vehicle purchase.




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Determine Your Budget

Before starting your car loan search, it’s crucial to determine your budget. This involves looking at your monthly income, existing debts, and setting parameters for factors like:

 

 

Having a clear budget and affordability guidelines from the outset will help you narrow down the wide field of available loans and vehicles to ones that fit your financial situation. Think about the maximum you’re able to put down and your ideal monthly payment target. Use online tools and car loan calculators to estimate payments based on things like loan amount, interest rate, and term length.

It’s better to overestimate expenses rather than underestimate. Include potential costs like sales tax, registration fees, and insurance in your budget as well. Being realistic about what you can afford each month prevents getting in over your head with loan payments down the road. Knowing your budget limitations is an essential first step to finding the right loan.

 

Check Your Credit Score

Your credit score plays a huge role in the loan terms and interest rates you’ll be offered. Lenders view applicants with higher scores as lower risk, so they reward them with better deals. It’s crucial to check your credit score before applying for any auto financing.

Make sure to review your scores across all three major credit bureaus – Equifax, TransUnion and Experian. You can access your credit reports and FICO credit scores for free once per year from each bureau at annualcreditreport.com. Purchasing your score directly from the bureaus or using a credit monitoring service can allow more frequent access.

If you find any errors or discrepancies in your credit reports, work to get those corrected right away before applying for a loan. Mistakes like duplicated accounts or inaccurately reported late payments can unjustly bring down your score. You have the right to dispute any incorrect items and have the credit bureaus investigate.

Knowing your precise credit score will give you an idea of what interest rates you can expect to qualify for. Take steps like paying down balances and disputing errors to maximize your score. A higher score translates to big savings on your auto loan.

 

Research Loan Options Thoroughly

Spend time thoroughly researching and comparing different loan types from various kinds of lenders like banks, credit unions, online lenders, and dealerships. Compare all the key factors to make an informed decision weighing the pros and cons of loans that best fit your budget and needs:

 

  • Interest rates – Lower rates save money over the loan term. Compare both APR and nominal interest rates across lenders.
  • Terms – Longer terms mean lower payments but higher total interest costs. Optimal terms depend on budget.
  • Fees – One-time fees at origination or prepayment penalties can add major costs.
  • Customer service – Having a responsive contact for support can be worth paying a bit more.
  • Online experience – Convenience and ease of application process varies.
  • Prepayment penalties – Loans with prepayment penalties make early repayment very costly.
  • Co-signer options – Some lenders allow co-signers which can help get approved and better rates.

 

Make an informed decision weighing all the pros and cons of loans that provide the optimal mix of low rates, affordable payments, and flexibility. Having quotes from multiple lenders empowers you to negotiate the best possible deal.

 

Get Preapproved

Getting preapproved for a car loan is highly recommended before starting your search. Preapproval provides an estimate of the loan amount and terms that lenders will likely offer based on your credit, income, and other factors. The preapproval process gives you loan quotes without impacting your credit score through hard inquiries. This allows you to see realistic terms you qualify for so you can negotiate better when it comes time to finalize the loan.

With a preapproval letter in hand when visiting dealers, you gain leverage in getting the best interest rates and loan terms. The dealer will know what kind of rates you already qualify for. This prevents them from inflating rates and steering you toward a more expensive financing option. Preapprovals also streamline the process when you’re ready to complete the official loan application, since the lender already has your information on file.

Overall, getting prequalified or preapproved lays the groundwork for informed negotiations and more favorable loan terms. You’ll have concrete data points on what an affordable monthly payment is for your budget and credit profile. With rate quotes in hand, you can comparison shop lenders and dealers with confidence.

 

Consider Down Payment Amount

Putting more money down lowers the financed amount so you pay less interest over the loan. However, low or $0 down payments may be attractive if funds are limited. Carefully weigh tradeoffs to make the right down payment choice for your situation.

Higher down payments reduce the amount you have to borrow and therefore lower your total interest charges over the loan term. For example, a $30,000 car with a $10,000 down payment only requires financing $20,000. The same car with no down payment means borrowing the full $30,000. That extra $10,000 adds significant interest costs.

While larger down payments save on interest, they also reduce funds available for other uses. Some buyers prefer putting down as little as possible to conserve cash. $0 down options also allow purchasing more expensive vehicles while keeping monthly payments affordable.

Evaluate your budget and savings to decide an optimal down payment amount. Just make sure to run the numbers on how much extra interest larger financed amounts accrue over the long run. Finding the right balance depends on your financial situation.

You can also look into down payment assistance programs if available. These provide funds specifically for auto down payments to qualified buyers. Assistance programs make it possible to put more down while preserving personal savings.

 

Compare Total Loan Costs

One of the most important factors when selecting a loan is the total interest you’ll pay over the full term. While comparing options, calculate the total interest charges for each loan’s duration based on the rate, amount borrowed and repayment period.

Loans with lower interest rates don’t always end up being less expensive in the long run. A loan with a higher rate but shorter term may actually cost you less overall than a longer loan at lower rate.

Run the numbers to see the total interest paid for each loan under consideration. Opting for the loan with the lowest total interest expenses will save you the most money over time.

Online auto loan calculators make this easy by showing total interest costs when you plug in loan details. Use them to accurately determine how much interest you’ll pay in total for each loan quote.

While lower monthly payments may seem appealing, a loan with higher payments can actually be more affordable if the total interest paid over the years is significantly less. Don’t just look at monthly costs, be sure to compare total loan prices.

 

Read Loan Terms Thoroughly

It’s essential to carefully read and understand every aspect of a loan offer before signing. You want to avoid unexpected clauses and fees down the road. Key things to look for include:

 

  • Prepayment penalties – Charges for paying off a loan early. Avoid loans with these.
  • Balloon payments – A large payment due at the end of the loan term. Make sure you can afford this.
  • Interest rate caps and adjustments – Check if rates can fluctuate or have caps.
  • Length of loan term – Longer terms have lower payments but higher interest.
  • Added fees – Processing fees, documentation fees, etc can add hundreds or thousands.
  • Default clauses – Understand penalties for late/non-payment.

 

Also verify the lender has physical copies of the agreement for your records. Never e-sign an auto loan contract before examining the fine print thoroughly first.

 

Consider Extras Like GAP

GAP insurance is an add-on that covers the difference between what your car is worth and what you still owe on your loan if your vehicle is totaled or stolen. For example, say you owe $15,000 on your car loan but your vehicle is only worth $10,000 when it’s totaled in an accident. GAP would pay the lender the $5,000 difference so you don’t end up still owing money on a car you no longer have.

GAP can provide important financial protection but also adds to the total loan cost. Carefully consider if it makes sense for your situation based on factors like:

 

  • Your down payment amount – The lower your down payment, the bigger the gap that could exist between loan balance and car value.
  • Length of your loan term – Longer loans mean you may be “upside down” on your loan balance for longer.
  • Your driving habits and risk factors – Your risk of accident can influence if GAP is worth it.
  • Make, model and mileage of your vehicle – GAP tends to be more beneficial for new cars that depreciate quickly.
  • Your insurance deductible amount – If you have a high deductible GAP may be less advantageous.

 

Doing some “what if” scenarios around potential accidents and car values can help assess if GAP insurance is a smart choice for your auto loan.

 

Check Dealer Financing Offers

Dealerships often partner with lenders to offer financing as part of the car buying process. This can be convenient but is also an opportunity for dealers to make extra profit through arranging loans. Carefully compare any dealer-offered financing against loans you are preapproved for.

Dealer financing may match or beat other rates to win your business, so don’t dismiss it outright. Negotiate the best terms possible, focusing on the APR and not just monthly payments. Dealers can lower rates by adjusting fees or extending loan terms. Make sure to compare bottom line costs.

If the dealer won’t budge on rate, you can use a preapproval as leverage to negotiate. Let them know you already have been approved for a lower rate they need to beat to earn your business. Competition from your outside loan provides a great position to negotiate from.

Read all paperwork closely and resist pressure to finalize dealer financing on the spot if you have doubts. Take documents home to review and compare costs to other loan options carefully before signing. Don’t feel forced to take dealer financing if the terms aren’t favorable.

 

Consider Co-Signing If Needed

If your credit score or history is lacking, getting a co-signer on the loan can open up better financing options. A co-signer agrees to be equally responsible for the loan payments with you. Since their income and creditworthiness is factored in, terms often improve dramatically with a co-signer.

For example, interest rates may decrease by several percentage points, saving thousands of dollars over the loan. Loan approval chances also go up with another person backing the financing. Parents, spouses, family members or friends with strong credit make ideal co-signers to help get your dream car.

Just be sure the co-signer understands their obligation in case you can’t make payments. Defaulting negatively impacts their credit too. Have an honest discussion beforehand so expectations are aligned. With a co-signer as a safety net, you can land affordable monthly payments and interest rates, even if your own credit profile needs rehabilitation.

 

Make a Decision

After researching multiple options and getting preapproved, you’ll be ready to make an informed decision choosing the best loan. Compare all the final loan terms side by side including:

 

  • Interest rates
  • Length of loan term
  • Total interest paid over the term
  • Fees like origination charges
  • Prepayment penalties
  • Co-signer requirements

 

Weigh the overall long term costs, not just monthly payments. Doing diligent research upfront pays off when you confidently select financing that fits your budget and needs.

If you have multiple good loan offers, use them to negotiate with lenders and dealerships. Having choices puts you in a better bargaining position to potentially lower interest rates further. Carefully go over paperwork to verify terms match what you agreed upon.

Committing to the optimal loan helps ensure affordable payments for the duration of the term. While it takes effort on the front end, choosing the best financing prevents surprises down the road. You’ll enjoy peace of mind knowing you picked the right loan to move forward on the open road with your new vehicle.

 

Look Into Refinancing Later

After establishing a solid payment history over the first 1-2 years of your loan, it can be worthwhile to check rates for refinancing. As you build credit with consistent on-time payments, lenders may offer better interest rates and terms on a refinance versus when first taking out the loan.

Refinancing to a lower rate can potentially save thousands of dollars in interest costs over the remaining loan duration. Online lenders and credit unions are often good options for finding competitive refinance rates. You’ll want to compare any refinance costs like origination fees to make sure the savings outweigh the costs.

A refinance may also give you flexibility to adjust the loan term. Shortening the term means you pay the loan off faster and reduce total interest paid. Lengthening the term lowers the monthly payment but increases the total interest over the life of the loan.

Look at refinancing once you have established a year or more of consistent payments. This shows lenders your creditworthiness and ability to reliably make payments over time. With an improved financial profile, you can shop around for the best terms on a refinanced loan.

 

Avoid Common Mistakes

When shopping for the optimal car loan, it’s important to steer clear of common errors that could lead to a bad financing experience. One of the biggest mistakes is focusing solely on the monthly payment amount without considering the full loan details. Dealers often structure long 7 or 8 year loans with low monthly payments that seem enticing. However, you end up paying significantly more interest over the life of the loan compared to a shorter 3 or 4 year term. It’s essential to look at the big picture including interest rates, total loan costs and repayment timeline rather than just the monthly payment.

Additionally, many buyers neglect to read the fine print in loan contracts. Make sure to scrutinize all terms and conditions to avoid unpleasant surprises like prepayment penalties or balloon payments down the road. Rushing into the first loan offer without shopping around and comparing multiple lenders is another misstep. Take the time upfront to explore all your options to find the best rates and terms. Avoiding these common mistakes takes diligence, but prevents making a financing choice you later come to regret.

 

Conclusion

Selecting the best car loan involves careful research and planning, but ensures you get optimal financing terms. The key steps covered in this guide provide a roadmap to navigate the journey:

 

  • Know your budget and credit score
  • Compare all loan options thoroughly
  • Get pre-approved to strengthen negotiating position
  • Evaluate down payment tradeoffs
  • Read the fine print on rates, fees, and terms
  • Consider extras like GAP insurance
  • Explore dealer financing deals
  • Make an informed decision weighing all factors
  • Consider refinancing later if it saves substantially

 

Following this process facilitates smart comparisons empowering you to confidently choose the most favorable loan. With the optimal financing secured, you can hit the road enjoying driving your new vehicle!

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Questions About Choosing The Best Car Loan

Canadians have several options when it comes to financing a car purchase. It’s important to shop around for the best rates and terms before deciding on a lender. Factors to consider include the interest rate, loan term length, fees and penalties associated with the loan, whether the loan is open or closed, and eligibility criteria. Taking the time to compare options will help ensure you get the most suitable car loan for your needs and budget.



Most Canadian lenders require a minimum credit score between 650 and 700 to qualify for car loan financing. The higher your score, the better the interest rate and loan terms you can qualify for. Anything below 650 will make approval difficult and mean paying higher interest rates if approved. Improving your credit score before applying will expand your financing options.



Yes, getting pre-approved for a car loan in Canada is highly recommended. Pre-approval provides you with an estimate of the loan amount, interest rate, and terms you qualify for based on your credit history and income. With a pre-approval letter in hand, you can negotiate more effectively at the dealership and avoid impulse financing decisions.

The average interest rate on new car loans from banks in Canada tends to range between 5% and 9%, while used car loans average 8% to 15%. Rates vary considerably depending on the lender, loan term length, size of down payment, and applicants’ credit scores. Those with excellent credit can qualify for rates as low as 0-3% from some lenders.



Dealer financing may seem convenient, but typically comes with higher interest rates. Banks and credit unions generally offer the lowest rates on car loans in Canada thanks to their buying power. Unless the dealer can beat the rate you’ve been pre-approved for, go with a bank or lender outside the dealership for the best terms.



Financial experts typically recommend car loan terms no longer than 5 years (60 months) in Canada. Shorter loan terms mean you pay significantly less interest over the life of the loan and own your car sooner. Aim for the shortest term you can afford based on the monthly payment – 36 to 48 months is ideal for most borrowers.

Yes, making a reasonable down payment of 10-20% or more on a car loan in Canada can secure you better interest rates and loan approval. The larger your down payment, the less money you have to borrow. Save up if you can, but avoid down payments under 5% as you may get stuck with higher rates.

Watch out for common fees like application/documentation fees, origination fees, prepayment penalties, and “registration” fees tacked onto car loans by some Canadian lenders and dealers. Ask if fees are mandatory and negotiate their removal or reduction to avoid excess charges. Low or no-fee loans offer the most savings.



Tips for securing the best loan rates in Canada include having a credit score over 700, shopping multiple lenders, getting pre-approved before visiting dealers, limiting your loan term to 5 years or less, making a sizable down payment, and negotiating with lenders to ask for discounts or rate-matches. Meeting these criteria displays you as a low lending risk.



Fixed rate car loans do not fluctuate and provide consistent, predictable monthly payments. In contrast, variable rate loans typically start lower but carry the risk of increasing over time as interest rates rise. Most experts recommend fixed rate auto loans in Canada for stability and peace of mind unless you plan to pay off your loan very quickly.

When applying for Canadian car loans, have these documents ready for lenders: valid ID, proof of income (pay stubs), proof of address, list of assets/liabilities, cost breakdown of vehicle you want to purchase, estimated taxes and fees information, down payment amount, and your driver’s abstract. This helps expedite the application and approval process.



New immigrants and foreign students in Canada may qualify for auto loans if they have a valid work permit, meet minimum income requirements, have been employed consistently for at least 4-6 months, and have a Canadian credit history of at least 12 months. Permanent residency also helps improve eligibility odds for those new to Canada.

Those with poor credit still have options like subprime lenders to secure car loans in Canada, albeit at higher interest rates. Down payment requirements also tend to be higher. Other bad credit financing options include co-signer loans, secured loans using collateral, and “buy here pay here” dealer financing. Improving your credit score can open up better loan offers.



Most major car manufacturers offer promotional financing with attractive rates to those with good credit. This incentive is meant to boost new car sales. However, outside lenders like banks and credit unions may match or beat manufacturer promo rates, so compare options before automatically financing with the dealer.

Those who filed a consumer proposal must wait 12 months after the date of discharge to qualify for a car loan in Canada. After a bankruptcy, most mainstream lenders require borrowers to re-establish good credit for at least 2 years following discharge to qualify. Subprime lenders may provide financing sooner but charge very high rates.

Both loan modifications and refinancing are options if your financial situation changes after taking out your original car loan in Canada. Modifications adjust the loan terms – for example, extending the repayment timeline temporarily if you are struggling with payments. Refinancing involves taking out a new loan to pay off your existing auto loan and get better rates.



Strategies to pay off car loans ahead of schedule in Canada include: making bi-weekly half payments instead of one monthly payment, paying more than the minimum due each month, putting windfalls like tax refunds towards the principal, selling non-essential assets to make lump sum payments, and refinancing your loan at a lower interest rate.



If you can no longer afford payments, avoid defaulting on your Canadian car loan. Talk to your lender immediately about options – you may qualify for reduced payments or deferrals for a short period. Refinancing and extending your loan term can lower payments but increases interest costs. Selling your car and paying back the loan early is also recommended if necessary.

Yes, self-employed Canadians can qualify for auto financing although approval standards tend to be more stringent. Most lenders require 2+ years of consistent self-employment income verified through tax returns and financial statements. Solid revenue, profits, credit score, and down payment contributions help offset the higher risk of self-employed car loan applicants.



When shopping for the best Canadian car loan rates, having multiple lenders run a credit check can temporarily impact your score but is unlikely to cause lasting effects. All inquiries within a 14-day period count as a single credit check, so limit applications to no more than five lenders at a time to minimize hits to your credit.



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