A responsive website like Car Loans Canada provides individuals with matching pre-approved car loans. However, it is still crucial that you understand how car loans work in Canada. It is a piece of information that will give you an edge whenever you want to buy a car.
Canada is a vast country, almost the size of the US yet with 10x less the population. That means a vehicle is an essential aspect of the Canadian way of life.
However, it can be challenging to wade through the murky waters of buying a car if you don’t know the options that are available to you.
Firstly, you have to decide whether you want to finance a car or take a lease. Leasing means that you can drive the vehicle as long as you want so far you abide by the terms of the lease contract. However, you don’t own the car for keeps.
Financing allows you to buy a car using credit extended to you from a lender. You agree to pay a monthly sum towards offsetting your car loan until the debt is paid in full. Because many Canadians use financing, it’s necessary to find out all you need to know about financing a vehicle.
How Do You Finance A Vehicle in Canada?
Vehicle financing involves a lender extending you credit that is equal in value to the cost of the vehicle. At the same time, the car serves as collateral for the loan if you default on your payments. If at any point in time, you stop servicing your loan, the lender has the right to take back the vehicle.
Your lender may be a bank, credit union, dealership, or online lender with a responsive website. Whoever it is, they can decide to sell your car to recoup their investment.
It is your job to negotiate a favourable loan, and this includes the term, interest rate, as well as the monthly payments. You will own 100% equity on the vehicle as soon as you finish paying off the principal and interest.
What are the Benefits and Drawbacks of Financing a Car?
It may surprise you to know that auto financing falls under the category of personal finance. That means there are benefits and drawbacks to taking a car loan. It’s pertinent also to understand that vehicle financing is unique to each individual. It may be right for you but bad for your neighbour down the street. If you’d like to know whether a car loan is right for you, see the pros and cons below:
Auto Financing Pros
Build Equity: If the value of the car exceeds the total amount of the loan, the deficit is the built equity. It merely means cash that’s tied up to a profitable purchase.
Ownership: In so far as you continue to make your payments in full and on time, the vehicle is yours to do as you wish. Unlike a lease where you only have possession, financing a car allows you to own the ride and enjoy it to its limits.
Lower insurance rates: Car loans usually have lower insurance rates compared to a lease.
Auto Financing Cons
Negative Equity: Unless the car is helping you to save money or adding to your income, it is a liability and not an asset.
Cars are especially good at losing market value, and the same holds for brand new vehicles. If the value of the car is less than the total amount spent on the loan, you’ve built negative equity.
Maintenance and Repairs: Because the vehicle is yours, you’re responsible for carrying out maintenance and repairs. And if you add that to the negative equity as explained above, you’d see there are good reasons not to finance a car.
Higher premiums: It’s a no-brainer that the monthly payments you make when you finance a vehicle is higher than what you’d pay if you took a lease. Don’t forget the monthly payments do not include other costs like maintenance and repairs.
How Long Does It Take To Finance A Vehicle?
As a general rule, it can take as long as whatever term both parties agree to finance a car. But vehicle loans are known to stretch as long as 84 months. The reason car loans are getting longer is because of lower monthly payments. The longer the loan term, the smaller the monthly payments.
If you have a fixed income, it may be better to stretch out the loan term as you’d be able to buy a car you’d generally not be able to afford.
However, the chances of having negative equity increases because you’re paying more money for the same value in the long run. And because cars lose value fast, you may end up paying far more than you bargained for.
What’s the difference between New and Used Vehicle Finance?
You get more benefits when you purchase a new vehicle because you’ll have less to spend on maintenance and repairs. It’s even possible to pay less because of the vehicle’s warranty. There’s also the assurance that comes with buying a new car because you know there’s not going to be any issues. And if there is, it’d be most likely be covered by the warranty.
The immediate drawback of buying a new car is that it loses value the moment you drive it out of the dealership. And if you decide to sell it in the future, you’re most likely going to sell it at a loss.
Another option is to buy a used vehicle. The distinct advantage of buying a used car is that you pay a far lower price. Lower prices translate into smaller monthly payments.
The drawback is that you may have to pay more to fix and maintain your car. The warranty may have expired at that point, and you are solely responsible for the cost of repairs.
How Can You Get the Best Car Financing Deals?
One of the best ways to get a good deal is to look at the terms of your lender’s offer carefully. The first thing is to know how much you can easily afford in monthly income payments. You mustn’t put a strain on your budget and end up with bad credit.
Once you know what you can pay, the next step is to check out the terms and conditions as well as the loan rate. The ideal way to negotiate a better deal with your lender is to make a higher down payment or boost your credit.
One of the best deals a car buyer can get is a 0% interest rate. It may sound too good to be true, but it does happen. However, you won’t get this deal in a bank as it’s the type of transaction that only automakers and dealerships can make. For them, higher turnover in sales means more profit. That’s why they can sell cars at 0% interest. The drawback is that this deal is only for buyers with an excellent credit score.
Final thoughts
If you’re financing your vehicle through a traditional lender, you shouldn’t concern yourself about scams. But you cannot always trust an online lender – even one with a responsive website. If a deal seems too good to be true, it probably is. There’s no such thing as a “guaranteed approval” and never give out your banking information before you complete a deal.
