A car is essential for many Canadian’s personal and work lives.
If you need a car, you have a few options: buy a vehicle outright, lease a car, or finance a car.
Unfortunately, many Canadians don’t have the savings to outright purchase a vehicle. The more commonly used options are leasing or financing.
Leasing involves driving a car that you can use freely, so long as you abide by the conditions of your agreement, but you do not own it. Financing means you purchase the car with credit and sign up to a payment plan until you entirely own the car. Canadians across the nation commonly leverage car financing. Let’s explore in-depth what car financing is and what you need to know before financing cars.
Car financing options in Canada involves a lender extending credit, equal to the vehicle’s total cost, to make the car purchase. The car is used as security for the loan to protect lenders from you potentially defaulting on payments. If you do stop making payments, your lender has the right to repossess your car and sell it to repay the owed debt. A lender could be a bank, car dealership, credit union, online lender or virtually any other lending institution. Part of the financing process involves calculating the loan’s term, interest rate, and monthly payments. Once you complete your term and finish making car loan payments, you will have 100% equity in your vehicle.
As with any other personal finance options, there are corresponding advantages and disadvantages to financing a vehicle. Keep in mind that everyone’s financial needs are unique. Vehicle financing may work well for some individuals, but not others. To determine if vehicle financing is right for you, consider the pros and cons below.
Generally speaking, you can finance a car for any amount of time. It depends on what you negotiate with your chosen lender. However, in 2015, the average length of a car loan was five and a half years. Since then, car loan durations have popularly gotten even longer, up to six or seven years.
Car loan durations have gotten longer for one reason: lower monthly payments. The longer you extend the term of a loan, the more you stretch out payments thereby making them lower. From a budgeting point of view, this is an excellent way to finance a car without stressing your wallet.
On the other hand, there is a risk that you will end up with negative equity. A lower car loan payment means you pay off your loan slower. If your car depreciates faster than you can pay down the loan, you’ll have negative equity. In addition, making car payments on a six or seven-year-old car on top of expensive repairs and maintenance can stress your budget. As with all financial decisions, what you decide now will impact you in the future. Make sure your decisions have a positive impact on your future.
Buying a new car is beneficial because you’ll pay less for repairs and maintenance. You may even pay less with the car’s warranty. There is also some peace of mind that comes with buying a new car because you know it won’t have any issues. The downside of purchasing a new car is it loses value rapidly the minute after you buy it. If you want to sell your vehicle down the road (pun intended!), you will likely lose money on the sale.
Alternatively, you can purchase a used car instead of a new car. The most notable benefit of buying a used car is the purchase price is much lower. The lower price means you will pay less money in interest too, so long as you snag a reasonable interest rate. The downside of buying a used car is the higher cost of repairs and maintenance. The warranty is likely expired meaning you are responsible for those expenses on your own.
When it comes to vehicle financing requirements, every lender is unique. Before completing an application, ask your lender what their minimum requirements are. If you don’t meet the minimum requirements, there is no chance you’ll get approved. Below are some basic car loan requirements you can expect from the majority of lenders.
As the old saying goes, the devil is in the details, and more specifically, the details of your loan agreement! To get the best deal, you will need to take a hard look at what your lender is offering you. Your very first step should be calculating how much you can comfortably afford in car payments each month. “Comfortably” is the key word here, you don’t want to stress your budget and end up in a bad financial situation. After that, the main two things you should focus on is the loan’s term and interest rate.
There is a bit of a trade-off with the loan term. The shorter the term, the less interest you’ll pay and the faster you will own the car. However, your total monthly payment will be higher. As for interest rates, the lower the better. To negotiate with your lender for a lower interest rate, try making a higher down payment or boosting your credit score. For some, cheap car finance is most important, while others want to own a car in the shortest amount of time possible. The “best deal” depends a lot on your preferences.
One of the best deals out there is 0 percent financing cars. You may be thinking, paying no interest is way too good to be true, but it is true! It is important to note that lenders do not offer this kind of financing, only automakers and dealerships. The idea is they can make more sales by offering 0% interest. Because 0% interest is such an amazing deal, it is usually only reserved for individuals with perfect credit. If you’re financing a car, it's worth applying for 0% financing offers, but don’t feel discouraged if you don’t get it.
If you have bad credit, there are more options to finance a car than ever before. Banks and other traditional lenders may decline your application, concluding that you are not reliable enough to repay the loan. Traditional lenders usually avoid this level of risk and prefer to work with prime customers.
That's why more Canadians are exploring online providers (such as Canada Drives). Canada Drives has spent over a decade building a network of prime and non-prime lending partners that look beyond your credit score at other metrics such as your income and bill payment history.
Regardless of your credit, you can get approved for finance with Canada Drives. It only takes three minutes to get approved today!
The car of your dreams is just a few clicks away! Shop Canada Drives today and access hundreds of certified vehicles online! Get started!