In 2021, over 1.5 million new vehicles were registered in Canada. As COVID-19 restrictions are lifted, people all over the world are returning to work and need new cars.
Many people purchase their vehicles outright, but car loans are a popular purchasing option.
Many new car buyers only look at the monthly payments and overall cost of the loan. But how long are car loans?
In reality, car loans can vary greatly in length and the down payment required. Are car loans with long terms and no down payment better?
It all depends on your situation, which is why you need to understand how car loans work first.
If you want to know more about long-term auto loans and keeping car payments low, we’ve got you covered. Read on for everything you need to know about car loans before heading to the dealership!
How Long Are Car Loans?
If you’re going to finance a vehicle, one of the key factors in choosing an auto loan is the length of the term. This is the amount of time you’ll have to make payments to pay off the loan completely.
Term lengths vary and generally come in increments of 12 months. A car loan term can be as short as 24 months, and in some cases can even last as long as 84 months.
Ideally, you should try to keep your loan term shorter than 72 months. While longer terms have some benefits like smaller payments, you run the risk of paying more than the value of the car.
Longer loan terms can cost you more in total because they generally have higher interest rates. However, you may prefer a longer loan term if you can’t afford much for a down payment or you need a new vehicle quickly.
What You Need to Know About Car Loans
In addition to term length, there are other important variables you should consider when financing a car. Factors like interest and down payment will depend on your credit score and annual income.
In order to make a profit on car loans, lenders charge interest for letting you borrow from them. To save money on your loan, you want to minimize the amount of interest you pay.
Interest is most commonly shown as APR (annual percentage rate). While APR and interest rate are often used interchangeably, they mean slightly different things.
The interest rate refers only to the percentage of the loan amount the lender is charging. APR, however, includes all the added costs and fees associated with the loan, so it will be a higher number than the interest rate.
Because APR encapsulates the entire cost of the loan, it’s more important to keep in mind than the interest rate.
Buyers with higher credit scores are often able to secure a car loan without a down payment. However, even if you qualify with no down payment, there are several benefits to making one.
Making a large down payment will lower your APR and monthly payment. A large enough down payment can even reduce the term length of your loan.
Benefits of Taking Out a Car Loan
You may be apprehensive about financing a car, especially with a longer term. However, a vehicle loan can offer several benefits to your finances.
Get Your Car Sooner
To buy a car outright, you may need to save for months or even years. Financing allows you to get the car right away and pay it off over time.
If you need a car immediately, financing is a good option as long as it fits within your budget.
Build Your Credit
Car loans can positively impact your credit score if you handle them responsibly.
As long as you make payments on time, your credit history will improve over time. Additionally, even buyers with poor credit can get approved for a loan.
You may need a bigger down payment or pay a higher APR if your credit isn’t great, however. You should try to stay well within your budget if you’re building credit.
Savings
Even if you have the funds available to pay cash for a car, you may want to keep those savings for something else. By paying your car off in monthly installments, you can even start saving for a down payment on your next car.
Holding on to your savings can also provide you with an emergency fund. You can use this money for unexpected repairs and maintenance as well.
Getting the Best Deal on a Car Loan
There are many lenders you can choose from for car loans. While having a lot of options is great, it can be overwhelming to try to get the best deal.
Keep reading for tips on how to get the best deal when shopping for car financing!
Get Your Credit Score Up
The first thing a lender looks at before making a financing offer is your credit score. As a result, before you start looking at cars, you should check your credit.
A higher credit score will earn you access to bigger loan amounts in addition to lower interest rates.
A credit score above 700 is considered good. Scores between 500 and 700 almost always qualify for financing but may pay more in interest.
You can expect interest rates as high as 18% if your credit score is below 500. Some lenders may not extend you a line of credit with a score this low.
If your score needs some attention, try to get it up before car shopping if you can wait. Taking out a loan with extremely high interest can cause you to fall behind on payments and make your score drop even more.
You may already have a bank account or credit card that provides you with your credit score. If not, there are several free websites where you can check your credit.
Compare Financing Offers
With so many options available, you shouldn’t accept the first offer you find without researching. Shop around to see which lender will give you the best terms on financing.
When comparing lenders, see what interest rates they’re offering, as well as the down payment they require. Different lenders may also offer you different term lengths.
Another good way to research lenders is to check online reviews and ratings. Not all creditors are ethical, unfortunately, so be sure to verify you’re financing through a reputable lender.
Prequalify
Before you go to the dealership, you should get a preapproval for the vehicle you’re considering. Banks and credit unions are a great way to get preapproved for auto financing.
Getting a preapproval will give you a good idea of where to start negotiating. You’ll have a handle on what interest rates and term lengths you qualify for.
The salesman may also try to undercut your preapproved financing to get you to finance through their lender.
Negotiate Price Instead of Payment
A classic sales tactic used at dealerships is to entice a buyer with low monthly payments. When you negotiate with a salesman, they will often try to steer negotiations toward payment instead of price.
This is because lower payments come from longer loan terms. A longer term usually means you’ll pay more in interest, which is more profitable for the dealership.
To avoid getting pushed to spend more on interest, negotiate the total price of the vehicle first. The salesman will try to get you to agree to a monthly payment but stay firm about settling on a price before negotiating payments.
What to Do if You Have Trouble Making Payments
Economic instability, sudden loss of income, and illness can make it difficult to pay loan amounts down. You have several options if you’re at risk of going into default.
Be proactive, as even missing one payment can be devastating to your credit. Go into default, and you run the risk of having your car repossessed.
Before you make any moves, consider your budget. Determine if this is a one-time issue or if the loan is something you can’t afford.
If you just need extra time or lower monthly payments, your next step is to talk to your lender. Creditors prefer to avoid repossession and will likely work with you on the terms of your loan.
You might be able to refinance your car loan if you’ve been working on your credit. Refinancing a loan can lower your payment and even your APR if your credit score has increased.
Finally, you may consider selling the car if it’s worth more than you owe. Then you can use the profit from the sale as a down payment on a car that you can more easily afford.
Get an Auto Loan That Fits Your Budget
How long are car loans on average? Most new car buyers take out loans for 60-72 months, but loans can be anywhere from 24-84 months.
Even if you have a low credit score, you still have options to find a car loan that works for you.
Our application process is quick and easy, with approval in minutes. Apply now to get your financing for a car approved today!