Cars are vital to the personal and professional lives of many Canadians.
If you need a car, you have several options: buy a car outright, lease a car, or finance a car.
Unfortunately, many Canadians don’t have the savings to buy a car outright. The most common options are leasing or financing.
Leasing is driving a car that you are free to use as long as you follow the terms of the contract, but do not own it. Financing means you buy the car on credit and sign a payment plan until you own the car outright. Canadians across the country frequently use auto financing. Let’s take a deep dive into what auto financing is and what you need to know before financing your car.
How does vehicle financing work in Canada?
Auto financing options in Canada involve lenders providing a loan equal to the total cost of purchasing the car. The car was used as collateral for the loan to protect the lender from a potential default. If you stop paying, your lender has the right to repossess your car and sell it to pay off the debt you owe. A lender can be a bank, auto dealer, credit union, online lender, or just about any other lender. Part of the financing process involves calculating the loan term, interest rate, and monthly repayments. Once you complete your term and complete the car loan payment, you will own 100% of your vehicle.
Advantages and Disadvantages of Vehicle Financing
As with all other self-financing options, there are pros and cons to financing a vehicle. Remember, everyone’s financial needs are unique. Vehicle financing may work well for some people, but not for others. To decide if vehicle financing is right for you, consider the pros and cons below.
Advantages of vehicle financing:
Build equity: Every money you pay for a car brings you one step closer to owning it. If you make all payments at the end of the term, you will own 100%. Unlike a lease, you no longer own the car at the end of the lease period.
Ownership: As long as you repay the loan in full and on time, the car is yours. You can use the car like a rental car without any restrictions. Changes and unlimited miles are at your disposal!
Lower insurance rates: With a car loan, you can often get lower insurance rates.
Disadvantages of vehicle financing:
Negative Equity: Cars are capricious assets because they depreciate quickly after purchase. This is especially true for brand new cars. If your car’s value is less than your outstanding loan balance, your equity is negative.
Repair and maintenance. Because you own the vehicle, you are responsible for repairs and maintenance. Repairs and maintenance don’t come cheap, especially as cars age.
Higher monthly payments: Financing a car is often more expensive than other options like leasing. Remember, the monthly payment is on top of other costs of owning the car.
How long can you finance a car for?
In principle, you can finance your car at any time. It depends on what you have negotiated with your chosen lender. In 2015, however, the average term of a car loan was five and a half years. Since then, auto loan terms have generally gotten longer, reaching six or seven years.
One of the reasons auto loan terms are getting longer: lower monthly payments. The longer you extend the term of your loan, the longer you extend your payments, thereby reducing them. From a budget perspective, this is an excellent way to finance a car without breaking the bank.
On the other hand, there is a chance that you could end up with negative equity. Lower car loan interest rates mean you’ll pay off your loan more slowly. If your car loses value faster than you can pay off your loan, you have negative equity. Also, paying for a car that is 6 or 7 years old on top of expensive repairs and maintenance can strain your budget. As with all financial decisions, the decisions you make now affect the future. Make sure your decisions have a positive impact on your future.
What is the difference between new car financing and used car financing?
Buying a new car is advantageous because you pay less for repairs and maintenance. With a car guarantee, you can pay even less. There is also a certain level of safety in buying a new car, knowing that there will be no problems. The downside to buying a new car is that within a minute of you buying it, its value quickly depreciates. If you want to sell your car on the street.
Alternatively, you can also buy a used car instead of a new one. The most significant benefit of buying a used car is that the purchase price is much lower. A lower price means you also pay less interest, as long as you get a reasonable rate. The downside of buying a used car is the higher cost of repairs and maintenance. The warranty may have expired, which means you will have to cover these costs yourself.
How to Qualify for Vehicle Financing in Canada
Each lender is unique when it comes to vehicle financing requirements. Before you fill out the application form, ask your lender about the minimum requirements. If you do not meet the minimum requirements, you have no chance of being admitted. Here are some basic auto loan requirements you can get from most lenders.
You must be of legal age and a resident of Canada
Government issued ID
Proof of income and savings
proof of insurance
How do I get the best auto financing deal?
As the saying goes, the devil is in the details, more precisely the details of your loan agreement! To get the best deal, you need to take a close look at what your lender has to offer you. Your first step should be to calculate how much car payment you can afford each month. “Convenience” is the key word here, you don’t want to go over your budget and end up in a bad financial situation. After that, you should mainly focus on the term and interest rate of the loan.
There is a small trade-off to the loan term. The shorter the term, the less interest you pay and the faster you can own the car. However, your total monthly payment will be higher. When it comes to interest rates, the lower the better. To negotiate a lower interest rate with your lender, try making a larger down payment or improving your credit history. For some people, cheap car financing is the most important thing, while others want to own a car as soon as possible.
One of the best deals is 0% car financing. You might think not paying interest is too good to be true, but it’s true! It’s worth noting that lenders don’t offer this type of financing, only automakers and dealers. The idea is that they can increase sales by offering 0% interest. Because 0% interest is so high, it’s usually reserved for people with good credit. If you’re financing a car, it’s worth applying for the 0% financing offer.
I have bad credit, can I still get a car loan?
If you have bad credit, there are more ways to finance your car than ever before. Banks and other traditional lenders may reject your application, arguing that you are not reliable enough to repay the loan. Traditional lenders generally avoid this risk, preferring to work with quality clients.
That’s why more and more Canadians are exploring online providers such as Canada Drives. Canada Drives has spent over a decade building a network of premium and non-premium credit partners that look not only at your credit score but other metrics like your income and bill payment history.
You can apply for financing with Canada Drives regardless of your balance. Get approved in just three minutes today!