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Managing Car Loan Payments

Managing Car Loan Payments

For most Canadians, one of the largest monthly expenses is their car payment. With the average new vehicle price over $40,000 in Canada, many people end up with auto loans of $500 or more per month once you factor in interest. This can quickly eat up a large chunk of your take-home pay.


When you feel like your car loan payment is getting out of control, it can be stressful and worrisome. But you’re not powerless – there are steps you can take to better manage your payments and reduce the burden.


This comprehensive guide provides tips and strategies to help Canadians take control of their auto loans. We’ll cover everything from budgeting properly for your car payment to exploring ways to pay off your loan faster or reduce interest costs.


By understanding your options and taking action, you can gain peace of mind and put yourself in a better financial position. Read on to learn how to master your car loan and payments.



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Understanding Key Car Loan Terms

When taking out an auto loan, it’s important to understand some of the key terms that will impact your payments and overall costs. Here are a few to know:

 

Principal – This refers to the amount you actually borrowed to purchase the vehicle. It’s the base amount, excluding interest and fees.

 

Interest – Interest is the cost of borrowing money. It’s typically charged as a percentage of the principal. The interest rate on a car loan can vary widely based on your credit, the lender, length of the loan, and other factors.

 

APR (Annual Percentage Rate) – The APR represents the total yearly cost of your loan, expressed as a percentage. It accounts for the interest rate plus any fees. A higher APR means you’ll pay more over the life of the loan.

 

Length of Loan Term – Auto loans typically range from 24 to 84 months. The longer the term, the lower your monthly payment will be, but the more interest you pay over time.

 

Understanding how these factors work together is key. For example, a loan with a higher principal and a higher interest rate will lead to a greater total repayment amount. Opting for a longer term lowers the payment but increases the interest paid. Looking at the APR gives you the full cost picture.

When reviewing loan offers, be sure to compare both the monthly payment and the total interest charges to make an informed decision.

 

Read Loan Agreement Carefully

It’s critical to read your auto loan agreement thoroughly and understand all the terms before signing. This legally binding contract spells out key details including:

 

  • The loan amount (principal)
  • Interest rate and whether it’s fixed or variable
  • Length of the loan term
  • Monthly payment amount
  • Fees for late payments or other violations
  • Prepayment penalties if you pay off early
  • Requirements for insurance coverage

 

Don’t just skim the paperwork and be sure to ask questions if anything is unclear. It’s essential to know the total interest costs over the life of the loan and avoid surprises. Watch out for extra fees like document or loan processing fees which can add to your overall costs.

You’ll also want to understand options if you fall behind on payments. Find out if there is any flexibility for deferring a payment in case of financial hardship. Knowing the potential penalties for late or missed payments allows you to avoid them.

Basically, read the fine print! Don’t sign anything until you fully grasp the terms and are confident you can adhere to them. An auto loan is a major financial commitment, so understand what you’re getting into.

 

Budget for Car Payment + Expenses

One of the keys to successfully managing your car payments is to budget properly for not just the payment itself, but also all the additional costs associated with owning a vehicle. When determining how much you can realistically afford for a car payment, experts recommend limiting it to no more than 10-15% of your monthly take-home pay.

For example, if your net income after taxes is $4,000 per month, your car payment should ideally be in the range of $400 – $600. This allows room in your budget for other essential expenses while keeping the car payment manageable.

In addition to the loan payment, remember to factor in costs such as:

 

 

Review all these anticipated costs, and include them when constructing your monthly budget. Having a complete budget that accurately reflects the full cost of owning your vehicle will help prevent payment struggles down the road.

It may require cutting back spending in other areas temporarily. But disciplined budgeting is vital for gaining control of your finances. Prioritizing your car payment and related expenses will help you manage this major monthly obligation while allowing room for other spending needs.

 

Refinance to Lower Interest Rate

One of the most effective ways to lower your monthly car payment is to refinance your auto loan. When you refinance, you take out a new loan to pay off your existing one. This gives you the opportunity to potentially qualify for a lower interest rate.

Interest rates can fluctuate over time, so even if you got the best rate when you originally financed, you may now be able to get an even better deal. Rates are also largely based on your credit score. If your score has improved since you first got the loan, refinancing could help you secure a lower rate.

To refinance, shop around with banks, credit unions, and online lenders to see what kind of rates you may qualify for. Getting pre-approved from multiple lenders lets you compare all your options. Focus on the annual percentage rate (APR) when comparing, as this factors in any fees.

Run the numbers to see how much you can potentially save by refinancing. While closing costs may apply, you can often recoup those savings fairly quickly if the rate is lower enough. Just don’t extend your loan term when you refinance, as that can negate any monthly savings.

Overall, if you can lower your interest rate by refinancing, it’s one of the most straightforward ways to reduce your monthly car loan payment and pay off your auto loan faster.

 

Extend the Loan Term Cautiously

One way some people try to lower their monthly car payment is by extending the repayment term of their auto loan. For example, you could potentially get a lower monthly payment by extending a 5-year loan to 6 years. However, this strategy has some pros and cons to consider.

On the pro side, extending your loan term will indeed result in a lower monthly payment, since you’re spreading the loan amount over more months. This can provide some temporary relief if cash flow is tight. Lower payments may help you avoid defaulting on the loan if you’re struggling to keep up.

However, there are some significant downsides. First, you’ll end up paying more interest costs over the life of the loan. With a longer term, you’re paying interest for an additional year or more. Second, you’ll be “upside down” on your loan longer, meaning you’ll owe more than the car is worth. This makes it harder to sell or trade in the car later.

Overall, extending your loan term just to get a lower payment should be done cautiously. It can provide temporary relief but results in greater costs long-term. Try to find other ways to cut expenses or increase income before resorting to this option.

 

Pay More Than Minimum

One of the easiest ways to pay off your car loan faster and reduce interest costs is to pay more than just the minimum payment each month. Even relatively small increases in your payment can make a big difference over the life of the loan.

For example, if you have a $20,000 loan at 4% interest over 5 years, your monthly payment would be around $377. By paying just $25 extra each month, you would pay off the loan almost 5 months early and save over $500 in interest charges. Paying $50 extra per month would pay off the loan over 10 months early and save you $1,000 in interest.

Every extra dollar you pay goes directly toward reducing your principal balance, which reduces the amount of interest that accrues each month. Paying extra also helps you pay down the loan faster since you are chipping away at the principal at a quicker rate. Even if you can only afford a small amount of extra payment each month, it adds up over time for significant savings.

Just make sure that any extra payment is clearly marked as going toward the principal only. Otherwise, the lender may simply advance your next payment due date rather than applying it to the principal balance. Paying extra toward principal is one of the simplest and most effective ways to become debt free faster.

 

Make Biweekly Payments

One of the easiest ways to pay off your car loan faster is to make biweekly payments instead of monthly payments. Here’s how it works:

 

With a monthly payment schedule, you make 12 full payments per year. But when you switch to biweekly payments, you’ll make 26 half-payments over the course of a year, which equals 13 full payments.

Making an extra payment each year can shave months or even years off your loan term. For example, let’s say you have a 5-year loan with a monthly payment of $400. If you kept making 12 $400 monthly payments, it would take 5 years to pay off. But by making 26 $200 biweekly payments, you’d end up making 13 $400 payments per year, allowing you to pay off the loan nearly a full year early!

The best way to implement biweekly payments is to set up automatic withdrawals from your bank account every other week. This ensures you never miss a payment while taking advantage of the accelerated payoff schedule. Just remember to account for the extra withdrawals in your budget.

Making biweekly car payments can seem like a “hack” to pay off your loan faster without having to refinance or make lump sum payments. Give it a try – you might be debt-free sooner than you think!

 

Pay Extra Toward Principal

One of the most effective ways to pay off your auto loan faster and reduce the total interest you pay is to make extra payments directly toward the principal balance. The principal is the amount you originally borrowed, excluding interest charges. By paying extra money toward this balance, you are reducing the total amount that interest accrues on.

When you make your regular monthly payment, most of that money goes toward paying interest charges first. Only a small portion is applied to the principal. By making an extra payment specifically to principal, you are bringing down your total loan balance faster.

Contact your lender to ask about the best way to target extra payments toward principal. Often you can indicate online that the extra amount should go directly to principal. Or you may need to send a separate payment and specify it is for principal only.

Even an extra $50 or $100 a month toward principal can make a big difference over the life of your loan. You’ll pay it off faster and reduce the total interest costs. Calculate the potential savings with an auto loan calculator. Paying extra principal is one of the smartest financial moves you can make.

 

Deferment Options If Needed

If you find yourself struggling to make your monthly car payments, speaking with your auto lender about possible relief options should be your first step. Many lenders today offer some type of deferment program that allows you to temporarily pause or skip payments.

A car payment deferment essentially pushes back a certain number of monthly payments to the end of your loan term. For example, your lender may allow you to defer 2 payments now and make those payments after your original maturity date. This can provide much-needed temporary financial relief.

However, it’s important to fully understand the terms and implications before deferring payments. There may be fees or interest charges associated with skipping payments. You’ll also end up paying more total interest over the life of the loan as it gets extended.

In addition, deferred payments may still be reported as late to the credit bureaus if the deferment is not handled properly by the lender. This could negatively impact your credit score. Always get any deferment agreement with your lender in writing.

Overall, payment deferment should be viewed as more of a last resort option if you’ve exhausted other possibilities. The pros and cons need to be weighed carefully. Other strategies like refinancing or trading in for a less expensive car may be better long-term solutions.

 

Voluntary Repossession

Voluntary repossession should be considered a last resort if you are truly unable to make your monthly car payments and have exhausted all other options. With voluntary repossession, you voluntarily surrender the vehicle to the lender. The lender will then sell the car to recoup as much of the remaining loan balance as possible.

While voluntary repossession does relieve you of having to continue making payments on a car you can no longer afford, it comes with severe consequences:

 

  • Your credit score will take a major hit, potentially dropping 100 points or more.
  • The repossession will remain on your credit report for 7 years.
  • You may owe a balance on the loan even after the car is sold, and the lender can pursue you for this deficiency balance.
  • You will have difficulty getting approved for future loans or credit.
  • You lose the ability to get around with a vehicle you own.

 

Because of the huge impact to your finances and credit, voluntary repossession should only be considered after you have seriously looked at all other options, including loan modifications, payment extensions, budgeting changes, and selling the vehicle privately.

If you simply cannot make the payments and have no other choice, voluntary repossession may be the only way to resolve an unaffordable auto loan. But know that it comes with lasting baggage, so look at it as an absolute last option after all others have been exhausted.

 

Get Preapproved Financing

Getting preapproved for auto financing before you start shopping for a car gives you important advantages in securing the best possible deal.

When you get preapproved, you’ll know your budget and the interest rates you qualify for based on your credit score and income. This knowledge gives you leverage when negotiating with dealerships, since you’ll already have financing lined up.

Dealers often make a significant portion of their profit on financing, so they may offer you a higher interest rate than what you’ve been preapproved for. But with a preapproval letter in hand, you can insist on the rate you’ve already secured or shop around between dealer financing offers.

Preapproval also shows car salespeople you’re a serious buyer, so they may be more motivated to negotiate a competitive price and financing terms with you. And you won’t feel pressured to accept whatever financing the dealer offers.

Overall, getting preapproved before shopping makes it much easier to understand your budget, monthly payment, and the true affordability of any car you’re considering. This gives you greater control over the process to secure the optimal deal.

 

Understand True Affordability

When shopping for a new car, it’s important to have a full understanding of the true costs of ownership beyond just the purchase price. This will help you determine if the monthly payment fits within your budget.

Do your research ahead of time to calculate the total costs of owning that vehicle. This includes:

 

  • Loan payment amount
  • Interest paid over the loan term
  • Insurance costs
  • Estimated fuel costs
  • Average maintenance and repairs
  • Registration fees
  • Depreciation costs

 

Add up all these costs to determine your total monthly expenditure for that vehicle. This provides a realistic view of affordability.

As a general rule, your car payment and related costs should not exceed 15% of your monthly take-home pay. If the total costs push your budget to the limit, that particular vehicle may be out of your price range.

Sticking to reasonable payment terms based on your income will help you manage your overall finances responsibly. Avoid stretching your budget too thin just to drive a car that’s beyond your means.

 

Negotiate the Best Deal on Price and APR

When shopping for a new or used vehicle, it’s important to negotiate the best possible deal. This includes getting the lowest purchase price but also securing the lowest annual percentage rate (APR) on your car loan.

Shop around with different dealers to compare prices on the same make and model. Online pricing sites like Unhaggle can provide insight into what others paid. Remember that advertised prices usually exclude fees so the final price may be higher.

Get pre-approved financing from your bank or credit union before visiting dealerships. This gives you bargaining power to negotiate the best interest rate. Dealers make profit on financing so they may offer special rates or incentives if you finance through them. But don’t take that at face value – compare the APR and do the math on total interest paid over the loan term to see which is truly the better deal.

When reviewing the sales contract, pay close attention to the APR and total interest charges. Negotiate these numbers just as you would the purchase price. Be willing to walk away if you can’t get satisfactory terms. There are always more vehicles and deals out there.

Taking the time to negotiate and compare options means you can feel confident you’re getting the best overall value. That makes managing payments easier over the long run.

 

Conclusion

Managing your car payments can be challenging but taking control of your finances is crucial. Here are some final tips:

 

Read all paperwork thoroughly when financing a car. Don’t gloss over any terms or sign anything you don’t fully understand. Ask questions if needed.

Create a realistic budget that properly accounts for your monthly car payment, insurance, gas, repairs and other ownership costs. Make sure you can truly afford the vehicle.

Look for opportunities to lower costs through refinancing, paying extra, or negotiating better insurance rates. Even small savings can make a difference.

If you start struggling to make payments, reach out to your lender right away. They may offer relief options and it’s better to address issues early before your situation worsens.

Taking the time to understand your loan, budget wisely, reduce costs where possible, and ask for help when needed will lead to successfully managing your car payments.

 

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Questions About Managing Car Loan Payments

There are a few ways to lower your car payment in Canada without refinancing your auto loan. You can extend your loan term to reduce your monthly payments, though you’ll pay more interest over the life of the loan. Making extra principal payments can help pay off your loan faster and reduce interest costs. Trading in your vehicle for a less expensive model or selling your car and buying a cheaper one outright are other options.



Tips for managing car loan debt in Canada include making your payments on time each month to avoid late fees and penalties, paying more than the minimum payment if possible to pay off the loan faster, avoiding taking out additional debt that makes the loan harder to pay off, and tracking all your expenses to create a budget that allocates money towards your car payment.

If you miss a car payment in Canada, you will incur late fees, damage your credit score, and potentially face vehicle repossession if you cannot get caught up on payments. Contact your lender immediately if you think you may miss a payment to discuss options like deferrals, extensions, or alternative payment arrangements. Consistently missing payments can lead to legal action, garnished wages, and bankruptcy.

If you can no longer afford your car payment in Canada, you have a few options like refinancing your loan to lower the monthly payment, voluntarily surrendering the vehicle to avoid repossession, or selling the vehicle either privately or to a dealer. You may owe more than the car is worth, but eliminating the payment gives you financial relief. Bankruptcy is an option of last resort if no other options will resolve the situation.



If your car gets repossessed in Canada, you will lose the vehicle but still owe any loan deficiency – the difference between what your vehicle sells for at auction and what you still owed on the loan. The lender can pursue legal action, garnish your wages, report the repossession to credit bureaus, and sue you for additional loan deficiency costs like fees, storage, transport, etc. Voluntary surrender is often a better option than repossession.



With biweekly car payments, you divide your monthly payment amount in half and pay that amount every two weeks instead of once a month. This adds up to the equivalent of one extra month’s payment each year, helping you pay the loan off faster and save on interest charges over the loan term.



Financial experts recommend limiting your monthly car payment to less than 10-15% of your take home income. So if your net monthly income is $4,000, you would want to keep your monthly car payment under $400-600. The average car payment in Canada is $500 per month. High income households may be able to afford higher payments comfortably.

Documents needed to get approved for a car loan in Canada typically include your driver’s license, proof of income through recent pay stubs or tax returns, proof of residency like a utility bill, information on the vehicle through the bill of sale, references, and your social insurance number so the lender can check your credit.

Putting down a 20% down payment or more when financing a car in Canada can help you get approved for better loan terms, reduce your monthly payments, and pay less in interest charges over the loan. However, low or no down payment options may be available for those with excellent credit. The higher your down payment, the less you have to finance.

The minimum credit score needed to qualify for car loan financing from most Canadian lenders is around 600, though scores of 650+ will get better interest rates. Those with scores in the good (670+) to excellent (800+) range will qualify for the lowest rates and best loan terms. Improving your credit can help you finance a car.

It is very difficult to get out of a car loan in Canada unless you can pay off the entire remaining balance or qualify to refinance into a new loan. Defaulting on the loan will severely damage your credit. Voluntary surrender to the lender, selling/trading the car, or including the loan in a consumer proposal or bankruptcy are some of the only ways out of the contractual obligation of the loan.

Consequences of defaulting on a car loan in Canada include the lender repossessing your vehicle, getting sued by the lender for the deficiency balance, having your wages garnished to repay what you owe, seriously damaging your credit score for years, needing to pay very high interest rates on future loans, and potentially facing bankruptcy. Avoid default at all costs.

You typically cannot negotiate the monthly payment amount on an existing car loan unless you refinance, which involves taking out a new loan. However, when initially financing, you may be able to negotiate the interest rate, loan term length, and down payment – all factors that influence the monthly payment amount. Just focus on the out the door price rather than payment.



The best ways to pay off car loan faster in Canada include making biweekly half payments instead of monthly payments to add an extra month’s worth of payments per year, paying at least 10-20% more than the minimum due each month, rounding up payments to the nearest $50 or $100, paying lump sums whenever possible, and refinancing to a shorter loan term if rates are lower.

If you lose your job in Canada and can no longer afford your car loan payments, it’s important to contact your lender as soon as possible to discuss options like payment deferrals, loan extensions, or loan modifications to avoid defaulting. You may also consider voluntarily surrendering the vehicle, refinancing, or selling the vehicle. Do not wait until you miss payments.

If your car loan interest rate is higher than the potential return you could reasonably expect to earn from investing, it usually makes more financial sense to prioritize paying off the loan early before investing extra funds. Paying off debt eliminates risk and guaranteed returns equal to your loan’s rate. An exception is very low rate loans.



Payment history on past loans and credit cards makes up a significant portion of your credit score in Canada. Having late or missed payments will negatively impact your score and ability to qualify for the best terms on a car loan. Good payment history leading to a higher score will qualify you for lower car loan rates and better loan terms from lenders.



The best places to get car loans in Canada are generally major banks like CIBC, RBC, TD, Scotiabank, and BMO that offer competitive rates along with credit unions and online lenders. Dealer financing tends to have higher rates but may offer purchase incentives. Compare options from multiple lenders before deciding where to finance.

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