Did you know that more than half of all new car loans in 2018 were financed for 84 months (7 years) or longer? Not only are Canadians buying more cars than ever, but they are financing them for longer as well.
If you are thinking about getting an auto loan soon to finance your dream car purchase, then we would like to warn you. There are many car loan mistakes Canadians make that causes them to pay much more and a lot longer for a car that’s not even worth that much money.
Keep reading to find out what these mistakes are and how you can finance your car without falling into these common pitfalls.
1. Do Not Focus on the Monthly Payment Alone
The problem with focusing entirely on the monthly payment is that a talented car salesperson can easily manipulate the numbers to seem like you are getting a great deal with a low monthly payment. But that could be because of some other hidden fees or factors that they are not revealing to you.
For example, you might be paying a low monthly payment for your beautiful new car, but instead of paying it off in 5 years with a bigger monthly payment, your loan takes 10 years to pay off!! Do you want to spend 10 years paying off a car that you will probably upgrade in a few years anyway?
You shouldn’t be paying for a car loan for longer than 6 years. It’s not worth it, since very few people even keep their cars for longer than 6 years.
Also, your salesperson might be giving you a quote on a low monthly payment but forgetting to tell you about all the additional extras that you would have to pay at the beginning of your contract. Be wary of monthly payments that seem too low – if it sounds too good to be true, it probably is.
2. Don't Shop Around Without Pre-approved Financing
This is a big mistake that lots of folks make when shopping around for a new car. You probably have a distinct idea of the kind of car you want. Picture this: Your dream car in that gorgeous color and with all the fixings.
But the problem is that if you walk into a dealership without pre-approved financing and you spot your dream car, you are more likely to agree to any terms and conditions just so you can get your hands on that car.
With pre-approved financing in place, you can stroll into a car dealership and know that you have the upper hand. Not only can they not pressure you into agreeing to any random financing terms, but you don’t have to accept their first offer since you have a benchmark that they have to beat if they want your business.
You might already know this, but you should never accept the first offer in any case. That’s the first rule of negotiation.
And with pre-approved financing in your pocket, you won’t have to accept the first offer no matter how much you want that dream car of yours. You can relax and agree to financing options that work for you rather than what works for the dealership.
3. Do Not Skip Reading the Fine Print
Unfortunately, no one reads the fine print on their auto loan, and this mistake could bite them in the behind later on. It’s easy to avoid this mistake, though.
All you need is a bit of patience and a teeny bit of skill with numbers. The problem is most folks find the whole process of buying a car so tiresome and exhausting that they just want to sign the papers once the agreement is reached and be off on their merry way home.
Do not let this happen to you. Make sure you are well-rested and have some sugar in your system, so you don’t end up going into negotiations with an empty belly. Eat some proteins or something filling before you make the rounds of the car dealerships, so you don’t deal with a sugar crash and become hangry or impatient.
Once you have the paperwork in front of you, take the time to read through it carefully.
- Do the numbers on the car loan agreement match the ones you agreed upon?
- What kind of car is listed on the agreement, and does it match what you want?
- What is the price of the car, the interest rate, and the length of the loan?
- Does everything on the agreement match what you discussed?
If there are any blank spaces in the document or any errors at all, make sure you deal with them right away. It’s much easier to fix them right now before you have signed the document than to haggle over them later. Never leave a dealership until you are sure that the agreement has all the right details.
Afterward, you can reward yourself with a delicious meal or a much-deserved nap. But for now, you need to be alert and focused.
4. Do Consider Online Lenders or Credit Unions
For some strange reason, most Canadians focus entirely on banks to fulfill their car loan needs. That’s a terrible mistake since if you shopped around a bit with online lenders or credit unions, you might end up finding a great deal that you would have missed otherwise.
The problem is that most people are fearful of the whole lending process and want it to be over with as soon as possible. The easiest and fastest thing then, you conclude, is to visit the bank that you already deal with and get a loan with them.
But what if you spent the time to shop around a bit more and found a better interest rate or better loan terms and conditions (or both) with another lender online or at a credit union. It would be worth that additional time you spent if you could pay off your car faster. Wouldn’t it?
5. Do Speak to Multiple Lenders
This is related to the point above, but do try to get quotes from several different lenders rather than only 1 or 2. The general trend with car loans is that most people will get one quote from a bank that they trust and then think that should be the best one out there. But how do you know if you haven’t shopped around?
The ideal would be if you got a car loan quote from your bank, a credit union, an online lender, and then another financial institution that you don’t bank with. With these four quotes at hand, you will know what the general market trends are for car loans, and you will end up with a better deal overall.
Also, the great thing about having several different quotes in your pocket is that you can use this as leverage or as a negotiating tactic with your preferred lender.
If you want to go with your bank because it’s easiest for you, but they aren’t giving you as good a deal as a credit union or online lender, then you can take this better quote to your bank and ask them to match it. In most cases, they will do so because they don’t want to lose your business.
6. Do Focus On Your Credit Score
Do you know what your credit score is? 56% of Canadians have never checked their credit score and have no idea what it could be. Also, 14% of Canadians only check their credit score once a year.
Your credit score has a lot to do with what kind of interest rate you will get from your lender. If you have a high credit score, you have proven to lenders that you are a worthy candidate for a loan since you are financially capable, and thus, you will receive a lower interest rate. The opposite applies if you have a low credit score.
Once you know what your credit score is, there are many things you can do to improve it. Take a few months to improve your low credit score.
This way, you will get a better interest rate on your car loan and end up paying less in interest over the lifetime of the loan, which is worth the time and effort you would spend on it.
In general, though, you should keep an eye on your credit score, checking it every few months to ensure that nothing’s changed and there are no unscrupulous charges on there. The quicker you dispute these strange charges, the better it is for your overall credit score and financial reputation.
7. Do Think About Financing First
When purchasing a car, most Canadians think of financing last. The first thing you probably think of is what kind of car you want to purchase, right?
Well, change the order here a bit, so you can avoid this crucial car loan mistake. Before you even think about what kind of car you want to buy, think about your financial situation and your financing options.
As iterated earlier, as soon as you have your financing set up, you are now the king of the lending castle. You have the upper hand, and no one can take that away from you. It will also give you a boost of confidence when speaking with lenders or car dealerships when you know you are all set up when it comes to your financing.
Also, if you are unable to get financing at your bank, then you have some time to start building up your credit score and go shopping for a better financing option.
8. Do Not Roll Your Existing Loan Into Your New One
Read this section quite carefully. If you get only one thing from this article, then let it be this point.
Lots of dealerships know that you might still have a loan leftover from your previous car, and they will use this to entice you to buy a car from them by saying, “Roll your existing loan into your new one!”
Do not buy into that sales pitch for a single second. Let’s go through an example to see why.
Let’s say you have a $10,000 loan balance leftover on a sedan that’s now worth $6000. This is because you made a couple of car loan mistakes and got a loan that’s too long, and you are still underwater with it.
If you roll-over the $4000 leftover onto another loan for $30,000 for a new SUV, then you will owe $34,000 on an SUV that’s worth only $30,000. See the problem here?
Moreover, as soon as you drive that new SUV off the parking lot, its value drops to $22,000. You have a $34,000 loan for an SUV that’s worth $12,000 less than that! Surely, you can see that this is a huge problem.
9. Do Try To Pay For Your Car Using Cash
This is a great one to think about before even thinking about getting an auto loan. Do you need to get a car loan? Truly?
If you have some savings in the bank or you have some IOUs that you could cash out, then instead of getting into long-term debt for a car that you would only drive for a few years, maybe consider paying cash for it. It’s not something that people think of too often because we are so conditioned to believe that a car loan is the only way to pay for a new car.
But if you have the cash sitting around in any case, why not use it to pay for your new car? That way, you can avoid all the interest payments. Also, you could funnel your loan payments into savings or investments, which is always a great idea.
Not to say that there aren’t other benefits of getting a car loan, especially when it comes to taxes. If you use your car for work, then it’s better to get a loan out on it than to pay cash. Consider your situation and figure out what’s best for you to do.
10. Do Not Take Out a Loan That's Too Long
Too many Canadians are paying hundreds of thousands of dollars in interest charges for long car loans (72 months or 84 months) when they could have avoided the whole mess by choosing appropriately from the start.
When you visit a lender or dealership, they are always going to want to entice you into a longer car loan because this means that your monthly payments will be lower, and that’s what everyone ends up focusing on. But if you are smart about it, you will ignore your monthly payment (see point 1 above) and focus on the other important parameters.
Look at how long the loan is and what is the interest rate first. These are much more important in determining how expensive your car loan ends up being overall.
Consider paying a larger monthly payment to ensure your car loan is only 36 to 48 months long. Interestingly enough, when you get a loan that’s too long, then that’s an additional risk to the lender, and they jack up the interest rates to protect themselves from that added risk.
So even though you might think that you would want that lower monthly payment, in the long run, a bigger monthly payment and a shorter car loan are the better way to go. Don’t worry if everyone else thinks that you are making a mistake; you know better!
11. Do Not Partake in Financing Add-ons
This is one of those car loan deals that everyone falls for but are terrible for your finances. The problem here is that you are adding all sorts of additional costs into your car loan that makes your car loan even more expensive for no reason.
Remember this – the only thing you want to finance in a car loan is the cost of the car. Everything else should be either paid for by cash OR avoided completely.
Many financial add-ones are a waste of money, not appropriate, or useless for your car or your situation. But because the salespeople at these dealerships are so adept at convincing you that you need to get these add-ons, you end up falling for their tricks.
These are some of the add-ones that get recommended; you should think through them carefully before saying yes to them:
- VIN etching
- Gap insurance
- Extended warranties
- Tire and wheel protection
- Paint and fabric protection
- Key protection
If you decide that one of these add-ons is necessary for your purchase, then go for it. BUT do not add it to your car loan, as you will be paying interest on these add-ons for the lifetime of the car loan. And you can end up paying hundreds of dollars for something that’s not worth that much.
12. Do Not Choose the Wrong Deal
Lots of times when business is slow or when dealerships are trying to get rid of old car models to make room for new ones, they might have radio or TV ads for special incentives. You might listen to some of these incentives, like zero-percent financing deals or cash rebates, and feel like it’s the best deal since sliced bread.
Do NOT fall for their ploy. These dealerships know exactly what they are doing, and they want to get you in the door so they can sell you a car that’s either not worth the deal they are offering or that the incentive ends up being more costly than the total cost of the car, in the long run.
Make sure you do your homework by crunching the numbers and figuring out if the ‘deal’ they are offering is a deal for you or if it’s just a tactic to get you to agree to a terrible car loan term.
13. Do Consider Your Monthly Budget
Before you end up buying a new car and upgrading from your old one, always consider your monthly budget first. Answer the questions below:
- Do you have any big expenses coming up that could skew your monthly budget?
- Can you afford the car loan right now, or would waiting for a few more months make more sense?
- Do you have some high-interest credit card debt that you should be paying off first?
- Will you still be comfortable and able to save with this additional car loan payment?
You want to take all the possibilities into account before plunging yourself and your family’s finances into a new car loan term for 5-7 years. Too many Canadian families don’t realize that they are just one bad financial decision away from bankruptcy.
Make sure you know exactly what you are letting yourself into by adding a car loan payment to your monthly budget. If you can’t swing it right now, then maybe consider waiting a few months to buy a new car and spending some money getting some repairs done on your old car.
This way, you can keep driving your old car for a bit longer and get your financial situation under control. There’s no urgency here – you can always get your new car after a few months.
Knowledge Is Power - Avoid These Car Loan Mistakes
The problem is that getting car loans has become so common in Canada that everyone just gets a car loan without thinking twice about it. Their ignorance leads them to make car loan mistakes that can be easily avoided with a bit of planning and foreknowledge.
Now that you are aware of all the various pitfalls of financing your car, you can go into the car buying process with a lot more confidence and with your head held high. You know what you are doing!
If you wish to get car financing from an online lender and get pre-approved before you go into a dealership (see point 2), then we are here to help. Apply now on our website without logging in or signing up.