For nowadays person it is hard to fancy living without an automobile both in big towns, as Toronto, Montreal, Calgary or Edmonton and villages. Mobility that a vehicle brings to many Canadians is a daily need, for example, to get to work or to bring children to school. But, not every family is able to save up the necessary amount for buying a car. We have to attract financing in the form of an installment loan, trade-in or leasing. In Canada, these financial products are offered by banks (Scotia Bank, TD Bank, RBC, CIBC, BMO and others), credit unions, financial companies (like Pacific car loans) and private persons through financial sites - aggregators. A borrower can purchase a new or a second-hand vehicle through an unsecured or secured loan with a variable or fixed percentage rate. Each credit offer has many parameters to liken. You can get a loan at a dealer or directly at a financial organization. How to select the cheapest credit proposal, which will fit you most and to increase your chances to get the financing? Even if your credit rating is poor or you desire no credit check? Bankchart.ca assists you in taking the needed steps.
Step one. What is vehicle credit? What kinds of the loans are offered in Canada (loans vs leasing vs trade-in)?
Car credit is a kind of a consumer loan for an automobile buy. You can get the financing in the form of installment title credit, trade-in or leasing. On such loans, the purchased vehicle acts as collateral. That's why the offered interest rates and terms are usually more profitable for a client comparing to credit cards and unsecured personal loans.
An installment title car loan is the most widely used form of automobile credit. Its advantages for a borrower are:
- You will become the car owner after repaying the loan. So, you will be able to dispose of this property for your consideration, for example, to sell it or to get credit secured by the vehicle
- You can make changes to the configuration of the automobile, for example, put it on nitro
- The borrower can drive the car long distances, without fear of possible penalties
- You build the credit history and higher your credit score
You can also lease a car if you:
- Want to lower monthly repayments. During leasing, you rent a car for a short time. So, your periodic payments will be smaller comparing to a car loan. Thus, you save money or can afford a better vehicle
- Need an automobile not often - leasing will be more profitable for you
- A leased vehicle, as a rule, is in good condition. Also, you can order related useful services from a leasing company, like road assistance or insurance
- You are able to use the car for a little period and then to change it to another new model
Some organizations provide you with the option of a rent-to-own car scheme. It is similar to an automobile lease, but at the end of the contract, you will have the possibility to buy it. A trade-in allows you to use your old vehicle as a prepayment on loan for a new car. Such a scheme will enable you to lower your monthly repayments to a bank or to get higher credit.
You can get an automobile loan from:
- Banks and credit unions - this variant provides you with a more extensive selection of credits proposals and their parameters. But you should be prepared, that the loan approval will take more time, and you are to make some efforts to prepare the documents. If you have a current account or credit card in a financial organization, you can rely on a discount to the interest rate
- Dealers will assist you in filling out an application and preparing necessary documents, as well as to choose a credit offer, which will be approved. You aren’t needed to go for a loan to another place. But, the credit price may be higher, because the applied bank can pay the dealer a commission for the deal
- Online lenders provide you with the possibility of comparing credit proposals and applying for a car loan online. Some of them offer instant car loans.
Step two. How to compare car credits?
Deciding to apply for a loan it is essential to get information about all credit parameters, like:
Interest is the rate a financial organization charges on a debt sum. The indicator can depend on such factors, as the prime rate size, a client’s credit rating, the automobile model, its age and others. By our research, the percentage rate on car loans in Canada varies from 2,99% to 10,00%. The average interest rate for a car loan is 6,30%.
More indicative is the comparison percentage rate, which includes not only interest expenses but also credit commissions. It is useful because financial organizations can lessen the rate level in their credit proposals, but charge more expenditures by monthly fees.
One-time servicing fee can be established in the form of a fixed sum or a percent of a car loan sum.
Canadian credit unions and banks rarely charge monthly commissions but they can higher car credit expenses greatly. A car loan with 0 interest rate, but with a periodic fee may be even more expensive than credit with interest rates.
Fixed rate car credits can have early exit fees. You should clarify their availability before taking a loan.
Financial organizations usually require you to pay annual car insurance during the loan term and sometimes also can demand a borrower’s life insurance.
Canadian banks usually provide car loans for 5-8 years. The greater is the term, the lower will be your monthly repayment, but in such a case the total loan expenditures will be higher. So, it is profitable to apply for the minimum term you can afford.
Repayment frequency - as a rule, you are provided to redeem the car loan on a weekly, bi-weekly or monthly basis.
An opening advance is an essential non-price parameter of vehicle credit. The higher it is, the lower will be your monthly repayment size.
Also, you should pay attention to such automobile credit parameters, as income requirements, demanded documents, a borrower age, redraw option, credit holidays possibility, percentage rate kind, etc.
Step three. How to apply for a car loan?
After you chose the car, you can switch to another step – applying for the credit. You can do it at dealers, banks or credit unions or online lenders. It is useful to check your credit rating before applying to estimate your chances to obtain vehicle financing. You can turn to companies TransUnion or Equifax - one credit report per year is free, or use sites Borrowell.com and CreditKarma.ca. The score equals 660 and higher is a good sign for obtaining the credit.
Also, it is useful to set up your family’s revenues and expenses to evaluate how much you can transfer monthly for future loan redemption. So, you will be able to choose the optimal loan amount, initial advance and the credit term.
As a rule, you must fit such requirements to apply for car financing:
- be at least eighteen years old
- have constant revenues and a place of work
- be a Canadian citizen
- have a good credit history
- have a driver’s license
- have no overdue liabilities
Do not be lazy to do some research to choose the credit offer with the lowest comparison rate. When applying, the manager can ask you such documents:
- Identificational: a passport, driver's license, pensioner card
- Financial: notices of assessment, monthly housing bills, statements from your current and savings accounts, etc.
- Others: the vehicle specification, invoice, documents confirming your property rights and others
Often the credit specialist can request the phone number of your employer or relatives to check the provided information.
You can also send the application online and attach copies of the mentioned above documents. It will simplify and speed up the deal - consideration of the application in such a case can take till an hour. In case of the affirmative decision the lender sends the loan amount to the dealer or individual, then you can drive the vehicle.
Some lenders enable you to make a pre-approval. This procedure is similar to approval and lets you know whether the car credit will be provided and how much you can get. But in such a case your credit score won’t be pulled out, so it won’t be suffered. Usually, a pre-approval can also be gone through online.
You shouldn’t apply for car credit to many lenders at once, because this can reduce your credit rating. If you receive a negative answer, do not be discouraged. Wait a moment, improve your credit rating and try again.
Step four. Should you purchase a used or a new automobile? What lending program to choose?
The main difference between a new and secondhand vehicle is its price. By the time an automobile gets 2-3 years, it can lose half of its value. So, you will need a lower credit amount and will pay fewer interest expenditures.
On the other hand, an old car has no warranty and needs more frequent repairs. Such loans can have higher interest rates. Credit proposals for used automobiles may have additional restrictions, for example, the purchased car must be up to 7 years old.
Purchasing an old car, you should pay more attention to the deal, in particular:
- inspect for deterioration the cabin: its upholstery, seats, brake pedals, etc
- verify carefully at the exterior for any deviations on the body, and question about the car's accident history
- bring the automobile for a technical examination before purchasing
- require a road test to appraise the steering, transmission, brakes etc.
- every time check a vehicle by daylight
If you decided to buy a new car, an installment secured automobile loan will be the most practical choice for you. Having already a vehicle, but with no time to sell it, you may choose a trade-in program. If you do not demand to drive frequently or for long distances, you should select a lease. A personal loan for any purpose or a credit card may suit if you are going to buy an old car.
If you don’t know about financial products a lot or want to speed up the process, you should choose a dealer purchase. But, if you want to negotiate with a financial organization by yourself, or have a current or savings account in one of them and are expected to get a discount, you may turn to a bank or a credit union. Applying to online lenders is also a quick and cheap way of obtaining a car loan. But, in such a case you should check the presence of a credit license.
Step five. How to get the most from a car loan?
To simplify the loan application process and lower the vehicle credit expenditures, you can:
- Check your credit rating before applying to appraise your chances of getting the loan. Necessarily research the credit market, investigate a draft of the credit agreement and appraise all parameters of the car loan
- Establish an automatic repayment to the loan from your current or savings account, and you will never omit the minimum monthly repayment
- Repay the loan earlier if there is no early exit fee. For example, if your monthly transfer equals 225,56 AUD, pay 250. Even in this case, after 6-12 months you will feel a decrease in the credit load
- Never use credit holidays, a balloon sum and borrow a little choosing the lowest affordable term, otherwise, your credit expenses will grow up
- Periodically check your credit score. If it increases, you can try to get car loan refinancing at a lower percentage rate
- If you experience financial difficulties, inform your credit manager in advance. The credit organization may provide you with credit holidays or establish a new schedule of repayment without charging you penalties.
Step six. Car finance for people with a bad loan score
Over one million potential borrowers in Canada have a weak credit rating in the size 600 or less. They are people with bad credit history or lack of it, and they have not only difficulties in obtaining a loan but also higher interest rates.
Unluckily, large commercial banks and credit unions in Canada are not eager to provide loans for such customers, but they are not the only creditors in the country. Online sites - financial agents offer loans from financial companies with more loyal credit conditions. Car dealers can pick up a financial organization with lower requirements to customers but can take an additional fee for their services.
The financial institutions may not even check a client’s credit score, because they have a scoring model and take into account a set of indicators of a potential borrower. But they usually take higher interest rates because of increased credit risks. You should also reinsure yourself and check that the companies have credit licenses.
Before applying for a car loan, you should properly calculate your financial budget. Besides maintenance expenditures (petrol, repairs and insurance), you will be charged percentage rates and fees by the bank. To select the cheapest loan, make a research of the lending market and thoroughly compare rates, fees and other essential credit parameters. Choose the most convenient for you form of financing: credit, leasing or trade-in. To get the most from your vehicle loan, you should set automatic payments, never use credit holidays, a balloon sum, borrow a little and select the smallest term, refinance the loan if the rates fall.