Did you know that 1.6 million new cars were registered in Canada last year alone? If you’re ready to invest in a vehicle, then you’ve probably started looking into your options for auto loans.
Unfortunately, this can sometimes feel like Pandora’s box. If you’re tired of reading about loans or terms you don’t understand, then you’re in the right place.
In this article, we’ll be teaching you about some of the different types of auto loans you can find in Canada. We’ll also give you some tips on finding the best possible loan terms for your needs.
That way, you can get on the road no matter what your current financial situation is like. Let’s get started!
Types of Auto Loans In Canada
According to the Finacial Consumer Agency of Canada, you can break down types of car loans in Canada into two general categories. The first option is for loans that are arranged through the dealer where you’re buying the car.
The second option is a car loan (or line of credit) that you get directly from a traditional financial institution. In this section, we’ll be diving into these two types of loans so that you can learn the difference between them.
Loans Taken Through the Auto Dealer
Depending on where you buy your car it’s likely that your dealer will offer you a loan arranged by them. Typically, you can fill out an application at the dealership to see whether or not you qualify.
The dealer may get their financing from a variety of different places. Sometimes it can be from the financing division of the car company (if they’re large enough).
Other times it might come from a traditional financial institution like a bank or credit union. Lastly, it may come from an independent financing company.
These are loan companies that specialize strictly in auto borrowing. There’s no denying that loans taken through the dealer are convenient. It’s often a one-stop shop for both your car and loan needs.
However, there are some drawbacks that you need to consider. When you take a loan through the auto dealer you’re basically at the mercy of whatever rates they throw at you.
That’s why it makes sense to check your options fully before you take a loan through the dealer.
Loans or Lines of Credit Taken Through Financial Institutions
As we mentioned, it’s a good idea to check your options before applying for a loan with a dealer. The good news is that there are a variety of other financial institutions that also offer loans. Some of the popular ones include:
- Banks
- Credit unions
- Online lenders
These types of loans are ideal if you’re in good standing with your current financial institution. For example, if you already have a mortgage with a bank, then you might be able to use that fact to negotiate for a lower auto loan.
Just make sure you’re checking the terms & conditions from these places to make sure they aren’t a potential scam.
Loans through a financial institution are also a good idea if you’re not in the best financial state. We’ll go more into this in another section. But, online lenders that cater to people with low credit are typically the best way to go.
What’s the Difference Between a Loan and a Lease?
Many people often confuse car loans with car leases in Canada. However, the two concepts couldn’t be more different. You can think of a car lease as a kind of extended, long-term car rental.
You will use the car for a couple of years (usually three to five) while making regular monthly payments. The difference is that you don’t own the car, even after the period expires.
That being said, most lease companies will give you the option to purchase the remainder of the car once the lease period ends. Leases are a good option for people that just prefer driving new cars.
However, it’s also ideal if you know you’re only going to be needing your vehicle for a few years. That being said, if your end goal is to own a vehicle, then an auto loan is the way to go.
The Basic Components of Canadian Car Loans
All too often borrowers will accept huge loans without fully understanding all of the terminologies.
So, in this section, we’ve broken down the basic components of a Canadian car loan into four components that you should understand. That way, you don’t accidentally get a loan with less than favorable conditions.
1. Principal
The principal refers to the initial amount of money you’ll need to purchase the car and any add-ons.
It’s common for dealers and lenders to also add fees to the principal. It’s important to note that the principal doesn’t include the down payment.
2. Interest Rate
Your interest rate refers to the amount of money that your lender will charge you in exchange for lending you the money. There are two types of ways that interest rates are charged with auto loans.
The first is simple interest. This is an interest rate that’s only charged to the principal. The second is a compound interest rate which is determined by both the principal and any interest you accrue since the beginning of your car loan.
In addition to the way rates are charged there are also two different types of interest rates. The first is a fixed interest loan. With this type of loan, your monthly payments stay the same from month to month.
The second is a variable interest loan which could fluctuate depending on the current state of the market.
3. Down Payment
A down payment is a lump sum that you put down at the start of your loan. When you put down a down payment it means that you’ll get both lower interest rates and lower monthly payments.
Lenders are willing to give more favorable terms for people with down payments because it’s less of a liability for them.
4. Term Length
The term length refers to how long it will take you to fully repay your loan. Auto loan terms can vary widely. In some cases, they can be two years or less. In other cases, they could be as long as eight years.
If your car loan is longer, then keep in mind that you might end up paying a lot in interest rates over the years.
How to Get the Best Deal
The first tip for getting the best auto loan deal is to purchase a new car with the loan. When you do these lenders are taking on less of a risk because the car will be much easier to sell in the event of a default.
However, this might be hard if you want a certain model of a new car. A global microchip shortage is making it harder than ever to get certain vehicles.
So, if you have your heart set on a certain new car, then you might need to wait. Next, try to get auto loan quotes that don’t do an inquiry into your credit history.
While one or two inquiries are fine, too many will start to harm your credit score. This can make it harder to find a good deal.
Make sure that the insurance company is only sharing your personal information with relevant third parties. You can usually find out if they’re doing this by checking their privacy policy.
Next, make a detailed list of any assets that you have. If you can prove to lenders that you have finances that you can fall back on, then they’ll over you more favorable rates.
Remember that a lender will always give you favorable conditions if they know you don’t need to borrow 100% of the purchase price.
So, if you have a down payment or a car you can trade in, then you’re going to have access to the best deals possible.
Lastly, make sure you compare multiple quotes from different lenders. Never settle on the first loan you’re offered.
How Are Car Loan Interest Rates Determined?
As you can see, the interest rate is one of the most important parts of any auto loan. So, it’s important to understand some of the ways that lenders set it.
The most common way is just by taking a look at your credit score. The lower your score is, the lower the interest rates your lender will offer you. Your income will also affect your interest loans.
Lenders pay attention to your annual income because it potentially affects your ability to pay them back. Keep in mind that a high income won’t be enough by itself.
Lenders will also want to make sure that your debt-to-income ratio isn’t too high. The length of your loan is another factor that can raise or lower your interest rate.
Some lenders will give you a lower interest rate for a loan that lasts longer. However, be careful. Just because your interest rate is lower here doesn’t mean that you’ll save money.
Next, if your vehicle is used or of lower quality, then you’re going to have higher interest rates. Why? Because if you default on a payment the lender will use your vehicle as collateral.
And, if it’s used, then it won’t get them a lot of money. If your interest rate is a variable rate instead of a fixed rate, then you can take advantage of lower interest rates too.
Finally, the overall state of the economy can affect auto loans as well. For example, right now there is a lot of inflation in Canada. This, in turn, is causing higher interest rates for everything from mortgages to car loans.
Types of Auto Loans For People With Bad Credit
If you have a credit score that ranges between 300 and 600, then you’ll likely have a hard time finding loan options. The good news is that there are still plenty of loans out there for people with bad credit.
However, keep in mind that you’ll likely get a smaller amount than if you had good credit. And, the interest rates will be higher. So, how do you lower those interest rates? There are three things you can try.
First, if you have a mortgage, then consider a home equity loan. With this type of loan you’re using any real estate value you have as collateral to lower your interest rates.
Just make sure you’re careful. If you can’t make payments, then debt collectors have a right to seize your home. Second, you can get a guarantor or a co-signed loan.
This is a good option if you have a family member or loved one that is willing to sign. Just make sure you’re letting them know what you’re getting into. If you can’t make a payment, then they will be forced to pay.
And, both your credit scores will be affected. Lastly, there’s a secured installment loan. This is similar to a home equity loan.
The difference is that you use a different asset instead of a house as collateral if you default. If you aren’t sure which type of loan is right for you, then contact a professional for more information.
Need Help Finding An Auto Loan? Contact CarsFast
We hope this article helped you learn more about the different types of auto loans. When you have bad or limited credit it can sometimes feel impossible to find favorable loan conditions.
Here at CarsFast, we know that the auto loan industry often prevents many Canadians from getting the vehicles they need. That’s why we believe credit history shouldn’t impact your ability to get an auto loan.
We work with multiple vendors to ensure that you’re getting the most favorable terms for your quote. Find out if you get approved by filling out our quick online application.