Did you know that Canada reported the average car loan rate for Canadians is close to 4.38 percent? That’s lower than the average in the U.S!
Buying a car is certainly not a new phenomenon. It’s something that people have been doing for at least a century or two. Yet, even with all that experience with auto purchasing in general, it’s not every day that people fully understand how complicated auto loans are.
If you’ve been sitting down and wondering “How do auto loans work?” it’s time to learn more about auto financing. Sure, it may seem complicated and showy, but the more work you do to simplify the situation, the better off you’ll be.
Auto loans are a trendy selling point for car dealers, so make sure you know what’s going on before you sign any papers. Buying a car is a long-term obligation and one that you shouldn’t take on without understanding what’s going on.
Keep reading to learn more about how auto loans work and how that might impact your purchase.
How Do Auto Loans Work?
When you don’t have the cash on hand for a new car, you will need to finance your vehicle through a loan. When you take out a car loan from a financial institution, they pay a lump sum to the car’s current owner. The owner may be a used car salesman, a dealership, or an individual.
Now that the car’s owner is taken care of, you will pay back the financial institution for the amount of the vehicle plus interest. There are a few things to keep in mind that will affect your monthly payment:
- the amount you borrowed
- the length of time on the loan
- your interest rate (the Annual Percentage Rate of APR)
Your Credit
Another vital thing to consider when purchasing a new car is your credit. If you have bad credit or even no credit, it’s essential to understand what that will do to your monthly payments.
Lower credit scores, in general, will increase the interest rate the bank will charge over the life of your loan. The increase in interest can add up over time, so if possible, try to work on your credit before shopping for a new car!
Low-income auto loans or possibly bad credit auto loans can be applied for depending on the lender. No credit auto loans are standard for someone looking to buy their first car as a young adult. Contact your local financial institution to see what options they have available.
Additionally, it would be best if you contemplated your loan term and the interest based on your credit score. For example, if you take the most extended loan term (typically 72 months), your monthly payment will be lower. However, that also means you will be paying much more in interest over the life of that loan.
Consider if you can manage the payments in a shorter loan term. Taking longer to pay off the loan can also provide issues if something were to go wrong with the car.
Down Payments
If you’re seriously considering a new car, putting a down payment is something to keep in mind. So, many people ask, “Do I have to put down a large sum to get a car?” The answer is; no, not always. Some car lots or salespeople may require a down payment, but it’s not always necessary.
Down payments towards your new car will lower the overall total before applying for the loan. For example, let’s say you want to purchase a 25,000-dollar car. If you put down two thousand at the dealership, your loan would only be for 23,000 dollars.
The down payment would lower your total loan, reducing your monthly payment and the amount of interest paid. If you can even put down five hundred or a thousand, this will significantly improve your pricing throughout the process.
Another way to pay toward the total amount before applying for a loan is trading in your current vehicle. Especially right now, as high as the market is, trading in your current car will save you thousands of dollars.
How To Apply For A Car Loan
The first step to getting a car loan is shopping for the right lender. There are many options for who will lend you the money, and you must shop around before picking a financial institution. Have your credit score in mind when you start this process!
Some financial institutions have higher interest rates, depending on whether you go with a credit union, bank, or dealership. Whoever you go with, they will show you multiple terms with various interest rates. Therefore, you must pick the loan duration and interest rate that fits your needs while trying to avoid paying a ton of interest.
Once you have chosen an institution, you will apply for your loan. Some banks and credit unions will pre-approve or pre-qualify you for a loan.
Utilizing an online lender such as Carsfast will significantly improve the process, creating an easy process for everyone.
Pre-Qualification
Pre-qualification estimates the possible interest rates and loan amounts you might expect to qualify for. They create this estimate based on the information they have about your credit history.
Pre-qualification requires a “soft” credit pull, which will not lower your credit score. However, The estimated rate given could change depending on what the lender finds later when they do a complete credit check.
Pre-Approval
Pre-approval is the next step up from pre-qualification. Unfortunately, it does require a “hard” credit pull which can lower your score for a short time.
In contrast, the hard credit pull will give your lender a clearer picture of your credit history. With that information, the lender can provide you with more accurate rates and loan terms, making your life easier in the long run.
Neither pre-qualification nor pre-approval guarantees your approval for the loan. Both options can help you budget and prepare for the upcoming purchase, but nothing is set in stone until you entirely apply for the loan.
Your Options
After shopping for interest rates and loan terms, it’s time to go to the dealership and take your dream car for a test drive. Once you have picked a car, it’s crucial that you also check out the financing options that the dealer offers.
Some dealers can offer you better interest rates than the local banks and credit unions. Car dealers can sometimes offer lower-than-average interest rates, depending on what you were pre-approved for by your financial institution. The dealer may fight to get your business by lowering his interest rates.
If you decide you don’t want to purchase through the dealer, you tell them you will be paying the total amount with the loan you discussed with your bank. There is paperwork that will need completing with the seller as well as the financial institutions, so make sure you have these items ready:
- Social security card
- Photo ID
- Proof of residence: a utility bill, for example
- Employment information
- Information regarding income sources
- Information about any other debt you might have
Finalize Your Loan
Once you have chosen the car and worked out all the details with the seller, it’s time to finalize your loan and sign the paperwork. Make sure to inquire about these possibilities in your contract:
- Hidden fees
- Extended loan terms
- Add-ons you did not ask for
- Early payoff penalties
Sometimes lenders will attempt to get you to take the most extended loan term because it makes them more interest money. Therefore, ensure your contract states the loan term you discussed with the financial advisor.
Complete the paperwork at both the financial institution and the dealership once you have decided how to pay for your vehicle. If you choose to go with the dealer’s offer, you can take that loan and disregard your other offers.
Good practice would be to call back the other institutions and let them know you found funding elsewhere.
Finally, The Car Is Yours!
You can get the keys now that everything is finalized, and the car is yours! Well, it’s not entirely yours until you pay off the loan, but you get the point. The lender will keep hold of the title to the purchased car until the loan gets paid in full.
After you start driving your new car, make sure that you are making your payments on time each month. With little to no credit, making on-time payments will do wonders for your credit score! Paying on time will also allow you to get other future loans quickly.
CarsFast
Carsfast is a Canadian-based auto loan company that can get you approved in minutes! Get approved today through the LendingArch network of dealers across Canada. This company specializes in assisting people with every type of credit.
Now that we have answered the question “How do auto loans work?” it’s time to get shopping!
The online application only takes around two minutes to complete online. So go on, what’s stopping you? Apply for your auto loan today!