How Car Loan Works in Canada

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It doesn’t matter whether it is your first or next car. Navigating through the many hurdles of buying a vehicle can be a righteous pain. Luckily for you, we have taken it upon ourselves to go the extra mile by providing you all the answers you need to buy a car with ease. You’ve probably thought about the process of getting an auto loan in Canada. It is to your benefit to understand the driving force (pun intended) behind auto loans and lenders as it will significantly improve your chances of securing a loan. The following questions will steer you through the right path to buying your car.

How Do You Get A Vehicle Loan?

The process of purchasing a vehicle with a loan may look hard from a spectator’s point of view. However, it is easy if you understand the mechanics (pun intended again) on the inside. If you decide to go through the dealership route, your dealer will assist you in filling your application form. The dealer will also help you submit the form to the lender. On the other hand, if you prefer to buy a car through a private seller, you’d probably do more legwork and submit your application to the bank yourself. It goes this way:

  • Fill the car loan form of your preferred lender. Include all the essential financial and personal info the lender needs to process your application.
  • You may have to provide other documentation requested by your lender. For instance, your lender may ask you to bring income documentation, expenses sheet, or notice of assessments. Your lender may also need to know the make of the car you want and the model.
  • The next step is a waiting game. Your lender may take as many as a few days to a couple of weeks to get back to you.

Car Loan: Bank VS Dealership?

An interesting trend has seen the rise of online service providers cutting into the market share of banks and dealerships. That’s why today, you can apply for an auto loan in three ways:

  • Bank: The Big Five, including Scotiabank, BMO, RBC, CIBC, and T.D., provide car loans amongst other banks. However, you’d need to have a very high credit score to qualify for approval. It can also be quite tasking to seek funding from a bank. You’d need to contend with several in-person appointments, loads of paperwork, and the car loan interest rates aren’t that great for individuals with a bad score.
  • Dealerships: The dealership at your locality – or any other place, usually provide financing choices at the point of sale. The options you get are tailored to the vehicle of your choice. The reason why dealerships are popular is that prospective buyers can get their car and financing in one venue. The downside to dealerships is that they often prefer individuals with a high credit score, and do not usually provide resources to help people with bad credit.
  • Online Service Providers: Online service providers such as Loan Connect and Car Loans Canada help customers by matching them with a pre-approved loan. Online service providers make the auto loan process convenient. Customers can fill their respective application forms from the comfort of their houses and get approval in a matter of days.

How Does Interest On A Car Loan Work?

The interest rate your lender will charge is based on a few factors, such as:

  • Your lender’s prime rate
  • Your credit score
  • The vehicle of your choice
  • Your down payment

Remember that your monthly payment is a combination of the interest and principal. Interest rates are generally more substantial at the beginning of payment and grow smaller as the amount winds up to a conclusion.

How is Interest Calculated on a Car Loan?

You can calculate your monthly interest payments by using a car loan calculator. To make proper use of the calculator, you’d have to know your credit score, the amount of money for the car loan, and the loan term.

What are the Criteria for Car Loans in Canada?

The requirements to obtain a car loan is unique to each lender or institution. However, some basics remain the same. These are:

  • Government I.D.
  • Proof of income
  • Proof of residency
  • Proof of Age
  • Proof of Car insurance
  • Consent to a credit check

How Can You Pay Off Your Vehicle Loan?

Car loans have repayment schedules that are fixed. What this means is that they become due for payment on a particular date. You can choose to make your payments monthly, but it isn’t set in stone. If you want to maintain or boost your credit score, it’s advisable to make your payments on time and in full. Not doing this can negatively impact your credit score. Lenders generally prefer that your payments are pre-authorized, so that it comes automatically out of your bank once the payment is due.

Furthermore, you can also make a higher payment than what’s agreed on the terms. The higher fees will help to reduce the loan period while serving as premature interest payments. Make sure you choose a lender who won’t make you pay penalties for choosing to pay higher rates.

Is it Possible to Get a Car Loan with Bad Credit?

Of course, it’s possible. However, it will help your cause to have a few bargaining chips to get a better deal from your lender. Some of the things you can do to increase your chances of securing a car loan with bad credit include:

Summary

The important takeaway for you is to understand there are three ways to finance your vehicle in Canada. No one way is better than the other as they all have their unique advantages and drawbacks. However, it is possible to carry out thorough research to find out what’s the best deal for your circumstance. If you enjoy driving around in the latest model of a new car, you should consider leasing a vehicle. But if you want a car that’s a lifetime keeper, you should opt for financing. The best bet for many Canadians is to stash a lot of cash and pay for the vehicle in full without worrying about interest payments. Whatever choice you make, ensure it’s the best for you!

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Avid researcher, freelance writer, and personal finance enthusiast passionate about financial education and literacy.

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Kareena Maya

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Kareena Maya is a freelance writer focused on the personal finance and travel spaces. He frequently writes about credit cards, banking, student loans, insurance, travel rewards and more. His work has been featured in publications such as Forbes Advisor, Bankrate, Credit Karma, Finance Buzz, The Ascent and Student Loan Planner.

Kareena Maya is a freelance writer focused on the personal finance and travel spaces. He frequently writes about credit cards, banking, student loans, insurance, travel rewards and more. His work has been featured in publications such as Forbes Advisor, Bankrate, Credit Karma, Finance Buzz, The Ascent and Student Loan Planner.