Auto Financing Resources

 

For any questions regarding car financing in Canada, see our resources below.

Common Car Financing Terms

 

Amortization: Amortization in car financing is the process of paying off a car loan over time through regular, equal payments. Each payment covers both the interest on the loan and a portion of the principal (the amount borrowed).

 

Annual Percentage Rate (APR):
The annual percentage rate (APR) for car loans is the yearly interest rate charged on a car loan. It includes both the interest on the loan and any fees or additional costs, giving you a complete picture of the total cost of borrowing.

 

Co-Signer: Co-signers are individuals who agree to take on the responsibility of paying back the car loan or debt if the primary borrower fails to do so.

 

Conditional Approval: Conditional approval for a car loan means that the lender has tentatively agreed to lend you a certain amount of money based on the information you've provided. However, final approval is contingent upon meeting specific conditions, such as verifying income, employment status, or providing additional documentation. It's not a guaranteed loan yet but indicates you're likely to be approved once all conditions are met.

 

Down Payment: A car loan down payment is an initial sum of money paid upfront when purchasing a vehicle through financing. It reduces the amount of money borrowed and is typically expressed as a percentage of the car's purchase price.

 

Interest Rate: A car loan interest rate is the percentage of the loan amount that the lender charges the borrower as a fee for borrowing the money to purchase a car.

 

Loan Term: A car loan term is the length of time you agree to repay the money borrowed to purchase a vehicle, typically stated in months or years.

 

Pre-Approval: A car loan pre-approval is a preliminary decision from a lender indicating how much money you can borrow to purchase a vehicle, based on your financial information and creditworthiness.

 

Total Cost: The total cost to buy a car refers to the entire amount of money needed to acquire a vehicle, including the purchase price plus any additional expenses such as taxes, fees, and optional extras like extended warranties or accessories.

 

Trade-In: A car trade-in refers to the process where a person exchanges their current vehicle for credit toward the purchase of another vehicle from a dealership.

 

How Car Loans Work

 

Car loans are a form of financing that allows individuals to purchase a vehicle by borrowing money from a lender, typically a bank, credit union, or dealership. When you take out a car loan, the lender pays for the car upfront, and you agree to repay the loan amount plus interest over a specified period, usually in monthly installments. The interest rate on the loan is determined based on factors such as your credit score, the loan amount, and the term length.

 

Before agreeing to a car loan, it's crucial to compare offers from different lenders to find the best terms and rates. Additionally, understanding the total cost of the loan, including any fees or penalties, helps ensure you can comfortably manage payments throughout the loan term.

 

 

3 Main Factors Of Car Loans

 

1. The Loan Amount (Principle): This is the overall cost of the vehicle, including any additional fees and add-ons, less the amount of your down payment. The cash you pay upfront is referred to as a down payment. Although technically you don’t need to put any money down when purchasing a car, it is strongly advised that you do so in the range of 20% of the entire price. By doing this, you can borrow less money and make smaller payments on your loan each pay period.

 

How it works:

You put down 20% for a car that costs $40,000 in total. 20% of $40,000 is $8,000. As a result, you will pay $8,000 for the car up front and borrow the remainder $32,000, which you will pay back over time.

 

2. APR (Annual Percentage Rate): This is your interest, a supplementary expense associated with a car loan. Borrowers raise interest rates because they need to profit from your loan. For new automobiles and used cars, respectively, the average yearly interest rate on a car loan in Canada is roughly 4% and 8%. Always remember to search around for auto loans because there may be a better offer or an incentive available. The interest rate can vary from lender to lender. Car Nation Canada will work with you regardless of your financial status and always offer exceptional prices.

 

3. Loan Term: The loan term is the length of time you have to repay your car loan. Typically, loan terms range from 36 to 72 months, though some lenders offer terms as short as 24 months or as long as 84 months. The length of your loan term will affect your monthly payments and the total amount of interest paid over the life of the loan. Shorter loan terms generally have higher monthly payments but lower overall interest costs. Conversely, longer loan terms usually have lower monthly payments but higher total interest expenses. It’s essential to choose a loan term that fits your budget while minimizing the cost of borrowing. When deciding on a loan term, consider your financial situation and future plans to ensure you can comfortably manage your payments throughout the loan period.

 

Car Loan Interest Rates

 

Car loan interest rates represent the additional amount you pay to the lender for borrowing money to finance your car purchase. This is essentially the cost of financing your vehicle, and it's expressed as a percentage of the loan amount.

 

 

The interest rate is a critical factor because it directly affects the total cost of your car loan over the repayment period. In Canada, car loan interest rates are typically calculated using either a fixed or a variable rate.

 

Fixed Interest Rate: A fixed interest rate remains constant throughout the entire repayment period of the loan. This means that your monthly payments and the overall interest costs remain consistent, providing predictability and stability in your financial planning.

 

Variable Interest Rate: A variable interest rate, on the other hand, fluctuates based on changes in a reference interest rate, such as the prime rate set by the Bank of Canada. This type of rate can result in varying monthly payments and interest costs over the course of the loan.

 

 

Factors Influencing Car Loan Interest Rates

 

Credit Score: Your credit score is a significant determinant of your interest rate. A higher credit score demonstrates your ability to manage credit responsibly, making you a lower-risk borrower. Lenders typically offer better interest rates to borrowers with higher credit scores.

 

Loan Term: The length of the loan repayment period can affect the interest rate. Generally, shorter loan terms may come with lower interest rates, as the lender's risk exposure is reduced.

 

Loan Amount: The total amount you're borrowing can impact your interest rate. Larger loans might lead to slightly higher interest rates due to increased risk for the lender.

 

Down Payment: A larger down payment can potentially lead to a lower interest rate, as it indicates your commitment to the purchase and reduces the lender's risk. Not sure how much to put down on your next car loan? Click here.

 

Type of Vehicle: The type of vehicle you're purchasing can influence the interest rate. Also, new vehicles might come with different rates compared to used vehicles, as the perceived risk associated with each varies.

 

Economic Conditions: General economic conditions and fluctuations in the interest rate market can impact car loan rates. Lenders adjust their rates based on changes in the broader economic landscape.

 

Lender Policies: Different lenders have varying lending policies and risk tolerance. Some lenders specialize in particular types of loans or borrowers, which can influence the rates they offer.

 

Budgeting for a Car Loan

 

The process of determining your budget and finding the perfect vehicle can be a challenging yet essential journey. We'll break down the factors that influence your car affordability and provide valuable insights to help you make an informed decision.

 

1. Understand Your Financial Position

 

Begin by assessing your monthly income and fixed expenses, such as rent or mortgage, utilities, and insurance. Factor in discretionary spending for groceries, entertainment, and savings. Once you have a clear picture of your financial landscape, you can better gauge how much you can allocate towards a car payment.

 

Monthly Income: Start by calculating your total monthly income, including your salary, bonuses, and any other sources of income. Ensure that you have a clear picture of the amount you can reliably count on each month.

 

Fixed Expenses: Enumerate your fixed monthly expenses, which typically include rent or mortgage payments, utilities, insurance premiums, loan payments, and any other obligations that remain constant. These are the non-negotiable expenditures that must be covered each month.

 

Discretionary Spending: Allocate a portion of your budget to discretionary spending, covering areas such as groceries, dining out, entertainment, and personal indulgences. This helps create a balanced lifestyle while considering your personal preferences.

 

 

Savings Goals: Prioritize savings by setting aside a portion of your income for future goals, emergencies, or investments. This not only builds a financial cushion but also ensures long-term financial stability.

 

Current Debts: Take stock of any outstanding debts, such as credit card balances, student loans, or other loans. Consider how these obligations impact your monthly cash flow and factor them into your overall financial landscape.

 

2. Use the 15% Rule

 

A practical rule of thumb for determining how much car you can afford is the 15% rule. This guideline suggests that your monthly car payment should not exceed 15% of your monthly take-home pay.

 

For example, if your monthly income is $4,000, aim for a car payment no higher than $600. This approach helps ensure that your car expenses remain within a manageable range, allowing you to maintain a balanced budget.

 

Remember to Factor in Additional Costs

 

While the monthly car payment is a significant component of your budget, it's crucial to consider additional costs associated with car ownership. These may include insurance, maintenance, fuel, potential repairs, and more.

 

 

By accounting for these expenses upfront, you can avoid financial strain down the road and ensure that you're buying a car you can afford and that it doesn't become a financial burden.

 

3. Get Pre-Approved

 

To streamline the car-buying process and gain a better understanding of your affordability, consider seeking pre-approval for an auto loan. Pre-approval involves providing your financial information to a lender, who will then assess your creditworthiness and determine the loan amount you qualify for.

 

By exploring pre-approval options, you not only gain a clear understanding of your affordability but also position yourself for a smoother car-buying experience. This proactive step not only streamlines the financial aspects but also instills confidence as you navigate dealerships and make decisions about your ideal vehicle.

 

This step not only empowers you with a clear budget but also positions you as a serious buyer when negotiating with dealerships. We'll talk more about car loan pre-approval below.

 

Financing a Car With Bad or No Credit

 

Life sometimes takes unexpected turns, and financial setbacks can leave a lasting mark on our credit scores. The stigma surrounding bad credit can often make us feel like we're stuck in gridlock. However, you can still find financing with credit issues. Here's what you should know.

 

Great Way to Build Credit: One of the primary benefits is the chance to build or rebuild your credit. By making consistent, on-time payments, you can improve your credit score significantly.

 

Variety of Financing Options: Lenders offer a range of financing options tailored for individuals with poor credit, including specialized loan programs and buy here pay here dealerships.

 

Loans are More Flexible: Many lenders provide flexible terms, such as longer loan durations to lower monthly payments or the option to refinance when your credit improves.

 

Co-Signer Benefits: Having a co-signer with good credit can help secure better loan terms and interest rates, benefiting both the borrower’s and co-signer’s credit scores.

 

Personalized Service: Specialized lenders often offer personalized customer service, providing advice and resources to help borrowers manage their loans and improve their financial situation.

 

Remember that when you finance a car with bad or no credit, you'll need to be prepared for higher interest rates. Lenders will always charge higher interest rates to those struggling with low credit because they are seen as "higher risk" borrowers. That's why it's always best to try and increase your credit as much as possible before buying a car, or you can save for a down payment and shorten the amount of time you're paying off the car. We talk about more tips for getting approved below.

 

 

Car Loan Pre-Approval Explained

 

Car loan pre-approval is a process through which a financial institution assesses your creditworthiness and determines the maximum amount they are willing to lend you to purchase a car. It's like getting a green light before you start shopping for a vehicle, which can be incredibly helpful.

 

Credit Assessment: When you apply for a car loan pre-approval, we send your application to a variety of lenders which we believe will give you the best offers. the lenders evaluate your credit history, credit score, and financial stability. They want to ensure that you are a responsible borrower who can repay the loan.

 

 

Maximum Loan Amount: Once your creditworthiness is determined, the lender will provide you with a maximum loan amount. This figure represents the highest sum they are willing to lend you for a car purchase.Knowing this amount can be beneficial as it helps you set a realistic budget and narrow down your choices when shopping for a vehicle.

 

Interest Rate: While car loan pre-approval doesn't guarantee a specific interest rate, it can give you a ballpark idea of the rates you may qualify for based on your creditworthiness. Canadian lenders offer varying interest rates, and having a pre-approval can help you compare and negotiate for better rates when you finalize your loan.

 

Benefits of Car Loan Pre-Approval

 

Budgeting: Pre-approval helps you establish a clear budget for your car purchase. Knowing your maximum loan amount ensures that you only consider vehicles within your price range, preventing you from overspending.

 

Saves Time: This is one of the biggest benefits of getting pre-approved. Car loan pre-approval streamlines the buying process. You won't need to wait for financing approval after selecting a vehicle, which can save you valuable time and make your car-buying experience more efficient.

 

Peace of Mind: Knowing that you are pre-approved for a car loan can provide peace of mind. You can shop with confidence, knowing that you have financing in place when you find the right vehicle.

 

Avoiding High-Pressure Sales Tactics: Without pre-approval, you may be more susceptible to high-pressure sales tactics from dealerships trying to secure financing on their terms. Pre-approval gives you control over your financing options.

 

Tips for Getting Approved

 

Enderstanding how to get approved for a car loan can make a significant difference in your ability to drive away with the car of your dreams. We'll explore a number of helpful tips to increase your chances of getting approved for a car loan

 

Know Your Credit Score: Your credit score plays a pivotal role in your loan approval process. Lenders use it to assess your creditworthiness. Before applying for a car loan, check your credit score and address any errors.If your score is less than ideal, consider taking steps to improve it by paying down outstanding debts and making timely payments.

 

Build Credit History: Building a strong credit history is vital. If you have a limited credit history, consider opening a credit card or taking out a small personal loan to establish a positive track record of borrowing and repaying money responsibly.

 

 

Save for a Down Payment: A substantial down payment can significantly improve your chances of loan approval. It shows lenders that you're financially committed to the purchase and reduces their risk. Aim to save at least 20% of the car's purchase price for a down payment.

 

Steady Income & Employment: Lenders want assurance that you can repay your car loan. Having a stable job and consistent income history is crucial. Be prepared to provide proof of employment and income through pay stubs or tax returns.

 

Get Pre-Approved: Seek pre-approval from a financial institution or your local dealership. This step not only helps you understand your budget but also gives you negotiating power with the dealership. Pre-approval demonstrates to the dealer that you are a serious and qualified buyer.

 

Find a Co-Signer: If you have a less-than-perfect credit history or limited income, consider having a co-signer. A co-signer is someone with good credit and financial stability who agrees to take responsibility for the loan if you default. This can boost your chances of approval and may even secure you a better interest rate.

 

Shop Around: Different lenders offer varying interest rates. Don't settle for the first offer you receive. Shop around and compare rates from banks, credit unions, and online lenders to find the most favorable terms.

 

Trade-in Your Current Vehicle: If you currently own a vehicle, consider trading it in. The trade-in value can be used as part of your down payment, reducing the amount you need to finance.

 

Budget Wisely: Once approved, it's crucial to budget wisely. Ensure that your monthly car payment fits comfortably within your overall budget, accounting for other expenses such as insurance, maintenance, and fuel.

 

Proving Income for a Car Loan

 

Proof of income is an essential part of any auto loan application. It is designed to back up your claim of having sufficient income to afford repayments and plays a pivotal part in deciding whether you’re accepted or not. But what exactly can you use as proof of income for car loans?

 

 

Proof of Income for Regular Employees

 

If you’re an employee, that’s easy. You can use a pay stub, salary statement or whatever form, letter or printout you get each fortnight or month with your pay. All employers are obliged to provide a written report of your pay on official paperwork outlining your pay, any deductions and any other changes to your standard pay. This is what you can use.

 

If your employer doesn’t use branded paper or less official pay stubs, you can supplement these with your bank statements showing your pay hitting your bank account. If you have more than one job that you’re using on an application, you would need paperwork for each job.

 

Proof of Income for Seasonal Workers

 

Seasonal workers looking for a car loan can also use pay stubs or salary statements but may also be asked for 2 or more years tax return to show how much and how regularly you get paid. This is to ensure you earn enough throughout the year to afford the loan.

 

The same guidance applies if you have more than one seasonal job. You’ll need paperwork for each individual job you use on your auto loan application.

 

Proof of Income for Self Employed or Contract Workers

 

Self-employed workers or contractors will need to use whatever paperwork is generated to show income. That’s usually tax returns but can also be formal contracts for ongoing work, bank statements showing your income as a freelancer or any contractors, or pay receipts you may generate. You can get your tax return from the CRA to use in an auto loan application.

 

We generally recommend adding bank statements to any auto loan application if you’re self-employed. It’s always better to offer too much evidence rather than not enough and not all lenders are as comfortable working with non-standard employment as others.

 

Other Proofs of Income

 

If you have income from investments, rent, social security or disability, you can use the official paperwork, annual income statements, your tax returns or whatever official paperwork is generated by whoever manages the income. If you manage your own income, you’ll need to use bank statements and tax returns to demonstrate there is enough to pay for the loan.