Buying a car is one of the biggest investments most people will ever make. For the first time in history, the average price of a vehicle has reached over $50,000. This means many people simply can’t afford to buy a car outright in a single payment.
The good news is that there are options to help you afford a car. Financing a car loan is actually much easier than you might expect if you know what to do; And ensuring you understand the process can also help you get a better deal.
Read on to learn more about how to qualify for a loan, what documents you need, and how much support you can expect.
Different Types of Car Loans
The first step in financing your new vehicle is to decide what type of loan or financial support you need.
Leasing
Depending on your job, income level and the cost of the car, you may choose to lease a vehicle instead of financing it.
Leasing a vehicle means you will be paying a small amount each month in order to use the car but you won’t own it. You can think of leasing as similar to renting a property where you don’t own the car at the end of the contract.
You can also get lease-to-buy contracts where you pay a slightly higher amount per month, so that in the end you will own the car.
However, this is very rare as most people choose to use a financing loan with lower interest rates.
Financing
If you do want to own the vehicle outright, then you will need to finance a car loan. Financing a car loan means another institution, such as a bank, will give you the money to buy the car. You must then pay this money back over a period of time.
There are two options. The first is a direct contract with a dealership. You will pay the dealership directly each month and you don’t need to take out a separate bank loan.
The second is a contract with a bank or other financial institution. You will receive the total amount of money upfront to pay for the car. Then, you pay the bank back over a set time.
Of course, you could take out a standard loan against another asset. Some companies will loan you money against a house or another car.
While taking out against another asset does increase the chance of you being approved, you may find it comes with a higher interest rate.
Financing A Car Loan In Canada
Once you’ve decided what type of loan you think will best suit your situation, you will need to prepare certain documents and information to prove that you qualify for the loan.
These documents and the information you provide will be used to help dictate the interest rate and the length of time the contract will be valid.
Read through the information below to find out what you need to do in order to qualify for car loan financing support.
Find Out Your Budget
One of the most important things you need to know about getting a loan for a car is how much you can borrow.
You should get an estimate before you decide what vehicle you want to buy, or else you may find your car is way out of your budget.
You can take an online assessment or speak to a bank, credit union, or specialist car finance and loan company to get a good idea of your situation. Try to get several estimates so you can make an informed decision about how much you will be able to spend.
Remember: Most companies will use your credit score to work out how much they are willing to lend you. You can check your credit score and take steps to improve it before going to get a quote to increase your chances.
Once you have a rough budget, make sure that whatever car you are buying isn’t way outside this quote.
Speak To The Car Dealership
Once you know your budget and you’ve narrowed down a few possible options, you should speak directly to the dealership about possible financing options.
If you’ve saved up a few thousand, you may be able to put down an initial payment, giving you a smaller loan. This can save money in the long run but does require you to save up a small amount before buying the car, which isn’t always possible.
However, some dealerships have set down-payment amounts. Generally, there will be a minimum amount of around 20% of the value of the vehicle.
You may want to change where you buy your car or where you get a loan based on this information.
If you want to use a large down payment, you will have lower monthly repayment amounts, which can be very helpful if you are concerned about your future income.
Picking The Right Loan Company
If you have a bad credit score, or you don’t have a credit score, you may find that a standard bank is unwilling to provide a loan.
However, specialist car loan financing companies may be more willing to provide you with financial support. At CarsFast Lending, we work with a network of dealers, so you are more likely to be approved and can get a better deal.
If your credit score is too low for a normal loan company, you may want to speak to a bad credit loan specialist. They will be able to provide advice on how to improve your score and what additional requirements you will need to fulfil in order to qualify.
If you are still struggling to get a loan, you can also apply for a used car financing loan which will help you afford a second-hand vehicle.
These loans come with conditions that the car you are meeting specific criteria. A second-hand car that was barely used and in good condition won’t be approved for this type of loan.
Applying For A Loan
There are a few basic things you will undoubtedly need to have on hand to finalize your loan. Make sure you have copies of:
- Proof of identity
- Proof of where you live
- Your Social Security Number (SIN)
- Proof of Income/ Bank Statements
- Proof of Driving License
- Proof of Insurance
Some companies will let you apply for a loan with the support of a partner or a third party who will be held liable if you miss payments.
In this case, you will also need proof of their identity, proof of their income or financial situation, and they will need to either come with you to sign or provide a statement on your application.
Check Your Loan Conditions
When you have decided on the car and found an institution to help finance a car loan, you should be sure to check the loan conditions. Check for hidden fees, potential fines, and loan mark-ups.
Interest Rate
One of the things you need to check is the interest rate. Your interest rate will be decided by the bank or loan company and will be based on your income, cost of the car, length of the repayment schedule and your credit score.
If you want to know exactly how much you will be paying back, make sure that the interest rate is fixed and won’t fluctuate from month to month. This means that no matter how many years your repayment schedule is over, your interest won’t change.
Alternatively, you can choose a variable rate which means your repayment amount will fluctuate month to month. This does make planning more difficult.
The upside of opting for a variable rate is that if the market changes, you may pay back less in the long run and save yourself some money.
A variable rate is more flexible and, therefore, riskier. It could pay off. However, the market could go the other way and then you might end up paying more than you thought.
Repayment Schedule
You should also check the length of the schedule for repayments and check if you are happy with it.
Importantly, you will also need to check what happens if you miss a payment. Missed payments can happen. Yu should ensure that one missed repayment won’t result in the company seizing your car or fining you a significant amount.
Repaying Your Car Loan
Once everything is signed and agreed upon, you can drive away with your new vehicle straight away.
Even though you technically owe money on it, you should consider the car your own. This means you are now responsible for damage, insurance, maintenance and upkeep.
Now you’ve officially bought the car, your repayments will be based on the schedule you agreed with the loan company.
Depending on the conditions, your first repayment may be the following month, or it could be almost immediately. Usually it will be within 30 days.
You will need to check your payment deadlines and make sure you pay before this date or risk a fine. You can set up automatic payments to help make this easier.
Minimum Monthly Payments
If your loan repayment plan has a minimum monthly payment, then you will need to pay this amount every month, plus interest. The minimum repayment comes off the initial loan amount and usually excludes interest. So, a minimum repayment of $532 means you’ll actually need to pay more than this to meet the loan criteria.
Some companies may let you pay off the loan faster by paying more each month, while other companies will only let you pay a set amount. You may be fined or subject to an extra charge if you try to pay the loan off early as you are minimizing the amount of interest you pay to the lender.
Getting A Good Deal
Your financial situation and future employment prospects will impact how good of a deal you can get.
However, you should make sure that whatever deal you choose is one that you can actually afford. A good rule to learn to be sure you aren’t taking out a loan that is too large for you is the 20/4/10 rule.
Try to have a down payment of at least 20% of the car value. Finance your loan for 4 years and keep your monthly payments to under 10% of your monthly income. This is generally considered to be a good way to ensure you have a good deal but won’t damage your financial situation in the long term.
Since cars depreciate in value, some people who can afford to pay for a car outright also choose to get a loan.
You can also get a good deal on a long-term loan by adding a condition that will allow you to refinance the loan and change cars.
If you have a four-year repayment schedule on a car and want to change cars after three years, you may be able to sell your current car and put the money towards a new car.
This may incur slightly higher monthly costs, but it can still be a good deal if you need or want to update your car.
Are You Ready To Finance A Car?
Buying a new car doesn’t have to be difficult if you know how to get a proper loan. Standard banks will be less likely to accept financing a car loan than specialist lenders, so it’s worth shopping around until you get a good deal.
The most important thing to remember is to gather all the paperwork you need, check your credit score and make sure you are working with a company that doesn’t have hidden fees.
For an immediate quote on cars, trucks, vans, and SUVs, and to compare lenders, apply today via our website.