Did you know that Canadians registered more than 1.6 million new vehicles in 2021? Considering the current economy, the majority of these vehicles required some kind of auto financing.
In Canada, there are several auto financing options to consider. The best choice for you will depend on your financial state, the kind of car you’re getting, and the auto loan terms you want.
If you’re considering buying a car soon, you need to know how to compare loan terms from one auto financing deal to another. To get the best deal possible on your next car learn, keep reading.
How Auto Financing Works
There are several kinds of auto loans out there. However, they all work similarly.
First, you’ll make some kind of initial deposit. Some loans may require a certain percentage of the total loan amount, while others may not have a requirement.
After you make your deposit and make your purchase, you can expect to make monthly payments over a set time period that you and the lender agree on.
No matter what auto financing option you choose, it’ll help you spread the cost of a car over a longer period of time. Although, if you decide to use a loan to help you buy your next car, you need to factor in the cost of the interest rate over time plus the fees you’ll have.
Auto Financing Options to Consider
Before you start looking at interest rates and fees, you should think about the type of auto loan you want. There are several structures that you can choose from. And, each one has its own pros and cons to consider.
Personal Loan
Personal loans are the most common type of auto financing. You can get a personal loan from an individual, a bank, a car dealer, and a myriad of other places.
Personal loans follow the loan structure that we’re used to following. We borrow a certain amount of money for a certain amount of time. During this time, you’ll make monthly repayments that include both the amount borrowed and the interest on that amount.
Usually, personal loans are unstructured. This means that the debt isn’t secured against your home, car, or other collateral.
Before committing to this kind of auto loan, you should make sure that the monthly payments and other terms match your budget.
Pros of these kinds of loans include flexibility of purchase, the quick ownership of the vehicle, and the bargaining power of any downpayment you may make.
Cons of these kinds of loans include the strong impact credit history has on the loan’s interest rate and the depreciation of the vehicle, which may make the loan more valuable than the car.
Personal Contract Purchase
A personal contract purchase (PCP) allows a finance company to purchase the car. In return for using the car they own, you’ll pay a deposit and fixed monthly installments over a period of time. During this time (usually one to four years), you do not own the vehicle.
Before beginning the contract, you and the company will agree upon a guaranteed final value (GFV). Some may refer to this as a balloon payment. This amount of money dictates how much you can pay at the end of the contract’s term in order to gain full ownership of the vehicle.
You do not have to buy at the end of the term. You have the option to give it back or partially exchange it for another.
Pros of these kinds of loans include lower payments and flexible ownership options that work well for indecisive drivers.
Cons of these kinds of loans include potential mileage/usage limits, depreciation of the vehicle, and multiple fees you may incur.
Hire Purchase
Hire purchase allows a finance company to buy the car, but you pay them back for it. At the end of the contract’s term, you will own the car outright.
Most of these loans require you to pay a 5-10% deposit. Then, you can pay fixed monthly installments over the contract’s term.
Like with personal loans, these payments will include the purchase price plus interest.
Pros of these kinds of loans include car ownership, the ability to borrow more, and the ability for individuals with poor credit to still get good loan terms.
Cons of these kinds of loans include the car working as collateral; the inability to sell the vehicle until you have full ownership, and the likelihood of higher monthly payments.
Compare Loan Terms
The quickest and easiest way to compare auto financing options is by using an online auto loan calculator. This tool will consider the cost of your loan over time.
After calculating the total cost of the loans you’re considering, you can compare their costs. Then, you can choose the best auto financing option for you based on the total and any terms and conditions that come with the loan.
Why Interest Rates Matter
The interest rate of a car loan lets you know how much money you’re paying to borrow money. These percentages may not seem like a big deal, but they can add up over time, especially if you choose a longer term for your loan. (We’ll discuss terms in a little bit.)
Focusing on the interest rate itself, you want to try to get the lower rate you can. However, this number depends on a multitude of factors:
- Your credit score
- Your credit history
- Your down payment
- The amount you’re borrowing
- Where you’re borrowing
- When you’re borrowing
- The type of loan you’re taking out
- Whether you’re getting a new or used car
As you’re looking at car loan offers, you may become discouraged if you don’t find the golden number you’re looking for. When it comes to interest rates, you need to shop around.
By looking at a variety of car loan types with a variety of terms and conditions, you may be able to find the interest rate you’re looking for. However, before you determine your golden number, you need to be realistic.
A poor credit score is not likely to get you a 2% interest rate on a car loan. Similarly, young adults are not likely to get this low of an interest rate unless someone cosigns on their loan.
Before you start shopping around, you should determine what interest rate range makes sense for your credit score and history. Then, you can start negotiating with different companies regarding the terms and conditions you’re looking for.
Additionally, you should keep in mind that you can refinance the loan for a lower interest rate later.
Choose the Length of Your Loan
The length of your loan also affects how much you pay over the contract period. A short-term loan is more likely to offer higher monthly payments, but you’re going to be paying less in interest. On the other hand, a long-term loan will offer lower monthly payments, but you’ll be paying more in interest over time.
If you can afford it, you should choose a shorter loan term. Not only will you pay less in interest; but you’ll also be able to finish paying off the loan faster.
That means you’ll be out of debt sooner!
However, if you can’t pay the monthly amount for a short-term loan, you should consider whether the interest you’ll pay over a long-term loan is worth the hassle.
How badly do you need a vehicle right now? Are the greater interest payments worth owning a vehicle?
If you decide that you’re in dire need of a vehicle, it’s okay to go with the longer loan term as long as you understand that you’re paying more in interest.
Consider More Than the Money
The amount that you pay towards the loan matters. However, people often forget that there’s more to a loan than the monthly payment.
There are fees, disclaimers, and other terms and conditions you need to remember as you’re looking at your auto financing options.
Loan A may have a lower interest rate, but it may also have huge late payment penalties. Loan B may offer a shorter term, but it may also have penalties for paying off the loan early.
You have to consider what loan qualities are important to you.
Do you want the option to pay the loan early? Do you want to be able to make the occasional late payment in case of emergencies? Do you care about what day you need to make the payment each month?
As you’re comparing auto financing options, you need to consider these characteristics, too. Here is a list of key terms in auto loans if you’re having trouble looking over your contract.
Pick the Best Auto Loan Terms
The ideal auto loan terms include a low-interest rate, short term, and conditions that match your needs. As you’re looking around at your auto financing options, you should consider each of these topics to ensure you’re getting the most out of your loan.
To make auto financing easier, try Carsfast. We can help you get approved for a car loan in minutes. Using a network of dealers across Canada, we can help you get approved with all kinds of credit scores.
If you’re ready to get started, apply with us today.