The Basics of Car Loans

 

Principal Amount: This is the actual amount of money you borrow to buy the car. Let's say the car you want costs $25,000, and you have a $5,000 down payment. Your principal amount would be $20,000.

 

Interest Rates: This is the percentage that the lender charges you for borrowing their money. Interest rates can vary depending on factors like your credit score, the loan term, and the type of car you're buying. A lower interest rate means you'll pay less overall for the car.

 

Loan Term: This refers to the length of time you have to repay the loan. Car loans typically range from 36 to 84 months (that's 3 to 7 years!). A longer loan term means lower monthly payments, but you'll end up paying more interest in the long run.

 

Down Payment: This is the initial chunk of money you put down towards the car's purchase price. A larger down payment reduces the amount you need to borrow, which can lead to lower monthly payments and less interest paid over the life of the loan. Some lenders even offer 0 down payment options, but keep in mind that this often means higher interest rates or a larger loan amount.

 

Monthly Payments: These are the regular payments you'll make to the lender, usually on a monthly basis, to repay the loan. Your monthly payment amount is calculated based on the principal amount, interest rate, and loan term.

 

 

Busting Car Loan Myths

 

Myth: "You need perfect credit to get a car loan." Reality: While a good credit score can get you better loan terms, you don't need perfect credit to get approved. There are dealerships like us who work with lenders that specialize in loans for people with less-than-perfect credit.

 

Myth: "You should always choose the shortest loan term possible." Reality: While a shorter loan term means less interest paid overall, it also means higher monthly payments. It's important to choose a loan term that fits your budget and financial goals.

 

The Car Loan Process

 

So, you've decided to take the plunge and finance your new ride. But where do you even begin? The car loan process might seem daunting at first, but it's actually more straightforward than you might think. Here's a step-by-step guide to help you navigate the road to car ownership:

 

Two Roads to Financing:

 

Before we delve into the steps, it's important to know that there are two main approaches to getting a car loan:

 

Pre-approval First: This involves getting pre-approved for a loan before you start car shopping. It's like having a financial roadmap in hand. You'll know exactly how much you can borrow, which gives you a clear budget and strengthens your negotiating position at the dealership.

 

Finding a Car First: In this scenario, you fall head over heels for a specific car and then start the financing process. You can apply for a loan through the dealership or seek financing from a bank or credit union.

 

 

The Steps Involved in Financing a Car Loan

 

Application: Whether you choose pre-approval first or have already chosen the car you want, the first step is to apply for a loan. This typically involves filling out an application form and providing information about your income, employment history, and credit history. You will also need to provide documents like pay stubs and bank statements. This may be done online or in person while you're at the dealership.

 

 

Approval or Denial: The lender will review your application and credit report to assess your creditworthiness. Factors like your credit score, debt-to-income ratio, and employment stability play a role in the decision. If approved, you'll receive a loan offer outlining the loan amount, interest rate, and loan term.

 

Finalize the Loan: If you accept the loan offer, you'll sign the loan agreement and make arrangements for your down payment and monthly payments. This might involve setting up automatic payments from your bank account.

 

How Are Car Loan Terms Decided?

 

You've found the car, you're ready to apply for a loan, but what factors will determine the terms you're offered? Lenders consider a variety of elements to assess your creditworthiness and determine the interest rate, loan term, and loan amount you qualify for. Let's break down some of the key players.

 

• New vs. Used Car Loans: Interest rates are generally lower for new cars because they depreciate faster, but of course they are generally more expensive.
• Dealership Financing vs. Bank Loans: Dealerships offer convenience, while banks/credit unions might offer better rates. Click here to learn more about the difference between them!
• Specialized Loans: If you have bad credit, there are specialized lenders who offer loans with more flexible terms.

 

 

Your Credit Score

 

Think of your credit score as a numerical summary of your credit history. It's a three-digit number that tells lenders how responsible you are with borrowing and repaying money. A higher score indicates you're a lower-risk borrower, which can translate to lower interest rates and more favorable loan terms.

 

 

How Credit Scores Are Calculated

Credit bureaus (like Equifax and TransUnion) use information from your credit report to calculate your score. Factors that influence your score include:

 

• Payment History: Paying your bills on time is crucial. Late payments can significantly lower your score.
• Credit Utilization: This refers to the amount of credit you're using compared to your total available credit. Keeping your credit utilization low (ideally below 30%) is beneficial for your score.
• Length of Credit History: A longer credit history generally leads to a higher score.
• Types of Credit: Having a mix of credit types (credit cards, loans, etc.) can positively impact your score.
• New Credit: Opening several new credit accounts in a short period can lower your score.

 

 

Tips On Improving Your Credit Score

 

• Pay your bills on time: Set up reminders or automatic payments to avoid late payments.
• Reduce your credit card balances: Aim to keep your credit utilization low.
• Don't close old credit accounts: Keeping older accounts open can help your credit history.
• Check your credit report for errors: Dispute any inaccuracies you find.

 

 

The Size of Your Down Payment

 

The down payment is the initial amount of money you put towards the car's purchase price. A larger down payment reduces the amount you need to borrow, which can have several benefits:

 

• Lower Monthly Payments: With a smaller loan amount, your monthly payments will be lower.

 

• Lower Interest Costs: You'll pay less interest over the life of the loan because you're borrowing less money.

 

• Improved Loan Terms: A larger down payment can sometimes help you qualify for a lower interest rate or a shorter loan term

 

Other Factors at Play

 

• Income and Employment History: Lenders want to see that you have a stable income and a steady employment history to ensure you can comfortably make your loan payments.

 

• Debt-to-Income Ratio: This compares your monthly debt payments to your monthly income. A lower debt-to-income ratio indicates you have more financial flexibility to take on a car loan. Click here for a DTO calculator.

 

• Vehicle Type and Age: Newer cars generally have lower interest rates than older or used cars because they depreciate faster.

 

• Loan Term: Shorter loan terms typically have higher monthly payments but lower overall interest costs. Longer loan terms have lower monthly payments but you'll end up paying more interest in the long run.

 

 

Tips For The Possible Car Loan Terms

 

Ready to hit the road to car ownership? Securing a favorable car loan can save you thousands of dollars over the life of your loan. Here are some expert tips to help you steer towards the best possible deal:

 

 

1. Polish Your Credit Score

 

Your credit score is your financial reputation. A higher score tells lenders you're a responsible borrower, increasing your chances of getting approved for a loan with a lower interest rate. Before you even start car shopping, take these steps to boost your creditworthiness:

 

• Check your credit report: Obtain a free copy of your credit report from Equifax and TransUnion. Review it carefully for any errors or inaccuracies and dispute them promptly.

 

• Pay your bills on time: Payment history is a major factor in your credit score. Set up reminders or automatic payments to ensure you never miss a due date.

 

• Reduce credit card balances: Aim to keep your credit utilization (the amount of credit you use compared to your available credit) below 30%. Paying down your credit card balances can significantly improve your score.

 

• Don't close old credit accounts: Closing old accounts can shorten your credit history, which can negatively impact your score.

 

2. Consider a Co-signer

 

If your credit score needs a little boost, consider enlisting the help of a co-signer. A co-signer is someone with good credit who agrees to share responsibility for the loan.

 

This can increase your chances of approval and help you secure better loan terms. However, it's important to remember that if you fail to make your payments, your co-signer will be held responsible.

 

3. Increase Your Down Payment

 

The more money you put down upfront, the less you'll need to borrow. This can lead to lower monthly payments, lower interest costs, and potentially better loan terms. Even a small increase in your down payment can make a big difference over the life of your loan.

 

4. Choose a Shorter Loan Term

 

While a shorter loan term means higher monthly payments, you'll end up paying less interest overall. If your budget allows, opt for the shortest loan term you can comfortably afford.

 

5. Shop Around and Compare Rates

 

Don't settle for the first loan offer you receive. Get quotes from multiple lenders, including banks, credit unions, and online lenders. Compare interest rates, loan terms, and fees to find the best deal.

 

 

6. Negotiate

 

Don't be afraid to negotiate with the lender. You might be able to secure a lower interest rate or more favorable loan terms by simply asking.

 

7. Consider the Total Cost of Ownership

 

When choosing a car, don't just focus on the monthly payment. Factor in other costs like insurance, fuel, maintenance, and potential repairs.

 

 

8. Be Aware of Hidden Fees

 

Read the loan agreement carefully and watch out for hidden fees like origination fees, application fees, or prepayment penalties.

 

Ready to take the wheel? Get pre-approved for a car loan today and start shopping with confidence! Click here to get pre-approved online today.

 

Frequently Asked Questions

 

1. What credit score do I need to get approved for a car loan?

 

While there's no magic number, a credit score of 650 or higher is generally considered good and will increase your chances of getting approved with favorable terms. However, even if your score is below 650, you still have options! Some lenders specialize in loans for people with less-than-perfect credit. Keep in mind that a lower score might mean a higher interest rate or a larger down payment requirement.

 

2. What documents do I need to get a car loan?

 

Lenders typically require the following documents:

 

• Proof of identity: Valid driver's license or passport
• Proof of income: Recent pay stubs or bank statements
• Proof of residence: Utility bill or bank statement with your current address
• Vehicle information: If you've already chosen a car, you'll need to provide details like the make, model, and vehicle identification number (VIN).

 

3. How long does it take to get a car loan?

 

The approval process can vary depending on the lender and your individual circumstances. In some cases, you can get pre-approved within minutes online. However, the entire process, from application to finalizing the loan, can take a few days to a week.

 

4. Can I get a car loan online?

 

Yes, absolutely! At Car Nation Canada, we offer a convenient online car loan application process. You can apply from the comfort of your home and get pre-approved quickly.

 

5. Can I use my trade-in as a down payment?

 

Yes, you can! Trading in your current vehicle can be a great way to reduce the amount you need to finance. The trade-in value will be deducted from the purchase price of your new car, effectively acting as a down payment.

 

6. How do I know my credit score?

 

You can obtain a free copy of your credit report from Equifax and TransUnion, the two major credit bureaus in Canada. These reports will include your credit score and detailed information about your credit history.

 

7. Should I buy a car with cash or get a car loan?

 

While buying with cash can save you money on interest, it might not always be the best option. If you have the cash available and don't want the commitment of monthly payments, buying with cash might be a good choice. However, if you need to deplete your savings significantly to buy a car, it might be wiser to get a car loan and keep some cash reserves for emergencies.

 

8. Can I get a car loan if I don't have a job?

 

It can be more challenging to get approved for a car loan without a steady income. However, some lenders might consider alternative forms of income, such as self-employment income or government benefits. You might also need a co-signer with a strong credit history and stable income.

 

9. Why are car loans better than leasing?

 

Car loans offer several advantages over leasing:

 

• Ownership: With a car loan, you own the car outright once you've made all the payments.\
• Customization: You can customize your car to your liking.
• No mileage restrictions: You can drive as much as you want without worrying about exceeding mileage limits.
• Flexibility: You can sell the car whenever you want.

 

10. Will I get approved for a car loan?

 

While approval is never guaranteed, there are several things you can do to increase your chances:

 

• Improve your credit score: Pay your bills on time, reduce credit card balances, and avoid opening too many new accounts.
• Save for a down payment: A larger down payment shows lenders you're serious about the purchase.
• Choose a car you can afford: Don't overextend your budget.
• Get pre-approved: This gives you a clear idea of what you can afford and strengthens your negotiating position.

 

If you're ready for a car loan in Southern Ontario, we'd love to help! simply fill in the form below to get started.