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You cannot turn on the TV or even stream a video these days without being bombarded by new car deals; it seems like every auto brand in the country is promising low rates and heavy discounts if you buy new. But it can be hard to sift the wheat from the chaff in these plentiful and noisy claims, so we’re here to help. Below is our definitive guide to new car financing – everything you need to know, and everything you were afraid to ask!
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Car or auto financing is, at its heart, very simple. It is a loan towards the purchase cost of a car. The loan provider (“lender”) analyzes the financial profile of the “borrower” (you) to determine how much you can borrow (the “loan amount”) and what interest rate you qualify for. The loan funds are then paid either to you or directly to the car seller.
You, as the borrower, repay the loan (principal plus interest) in set installments (usually monthly, bi-weekly or weekly), until the loan is completely repaid. The length of the loan is known as the “term”, and your “repayment amount” is calculated by dividing the total cost of the loan over the whole term by the number of payments you’ll make.
The reason you’ll see so many adverts for new car financing is that it is specifically set up to encourage the purchase of new cars, rather than the purchase of used cars. This is done by making the details of the loans incredibly attractive – very low interest rates, long loan terms, no required downpayment, and significant cash bonuses for purchasing higher-end models. But these terms are only available for the most qualified borrowers (those with excellent credit and high income, and no other debt) and only when purchasing new. It can however mean that when you’re comparing costs, a new car (at a better rate) might be cheaper than a used car (at a worse rate).
All of this is an effort to drive growth in the auto sales industry, and these kinds of financing deals are possible because auto brands often have their own financing division that provides preferential rates to their customers. So when buying a new car you can go to a dealership and have every aspect of your car purchase handled for you there, including applying for, obtaining and administering your car loan.
No matter where you go for a car loan, what type of car you buy, or even whether you choose to go new or used, there are some key aspects of financing that you must be familiar with to understand your loan options:
The interest rate is the amount you’ll pay for borrowing funds for your auto purchase; it’s crucial to understand how your interest rate is calculated and applied, as the maths can make a big difference to how much your loan will actually end up costing. Many lenders advertise one rate, but the one you want to focus on is the APR – the annual percentage rate. This is the effective rate per year, and is a baseline you can use to compare rates across lenders (as otherwise you can’t be sure you’re comparing like with like).
The loan term is the length of the loan’s life – how long it takes to pay back. This is another important factor to understand; a shorter loan will accrue less interest over the life of the loan, but because you’re repaying it more quickly, the monthly repayments will be higher. On the other hand, a longer life loan may have a lower monthly repayment number, but this will cost you more in interest overall as you’ll be paying back the loan for longer. Choosing a loan term must be a balance between what you can afford and avoiding paying unnecessary interest.
The loan amount is the amount of money you borrow to purchase a new car; this may be the entire cost of the car, or the purchase price plus taxes and fees, or all of this minus a downpayment. Usually any associated fees and taxes related to the sale of the car and the origination of the loan are included in this loan amount.
A downpayment is a cash amount you contribute towards the cost of the car purchase; many new car sales do not require a downpayment, or have very low requirements. But if you’re able to put down an initial lump sum, this will lower your loan amount and save you money in the long run.
There may be fees and penalties associated with a new car loan. These vary lender to lender, but include items such as an application fee, an origination fee, a closing fee, late repayment fees, early repayment penalties, and so on. Usually, to make a new car loan as attractive as possible, car brands will waive many of the upfront costs.
Lastly, you need to decide on what schedule you wish to repay your car loan. This has a big impact on how much each payment amount will be. Most people choose either bi-weekly or monthly, to match their paycheck frequency, but don’t get caught out: bi-weekly is not the same as semi-monthly! If you choose semi-monthly, you’ll make 24 payments in a year, and bi-weekly equals 26 payments per year.
We mentioned above that a lot of car manufacturers have their own financing, so let’s take a look at some of them. These are some of the most popular car brands in Canada:
Many companies advertise 0% interest on car loans, but this rate is only applicable to the most qualified borrowers. So to be eligible for this rate you need excellent credit, few other debts, and a high income. It also helps if you have a downpayment to put towards the cost of the car.
Auto financing is available from many different lenders; most people opt for dealer financing when purchasing a new car, for simplicity, but there are other options. Online lenders have competitive rates, and you may also qualify for a car loan from your bank, credit union, or another financial service provider. Always research rates to find the best deal for you.
That depends on where you go; dealers usually try to bundle the financing arranged through them with the car, so (in theory) it’ll all be in place by the time you’re ready to pick up your new vehicle. Online lenders can also be quick, sometimes even able to offer turnaround in just a few days. Banks and credit unions take a little longer, up to a week or more.
Fees depend on the lender you go to and the deals you qualify for; many dealerships waive initial fees when setting up a new car loan, simply to get your business. However, always check the small print – on any loan – to fully understand what fees you may be liable for. This includes closing fees and late or early payment penalties.
Yes, new car financing is absolutely available outside of your chosen car dealership. Online lenders often have competitive products, so it’s wise to check there even if your dealership is offering to help you, in case you can save money. Banks and credit unions, and other financial providers, also offer auto loans and other types of loan (like personal loans) that can be used towards the cost of a new car.
Having bad credit does not preclude you from qualifying for a car loan for a new car, but you should be aware that it does mean you won’t qualify for the “banner” rates shown on advertising. These rates are reserved for those with high credit scores and high income. That doesn’t mean you can’t qualify though, just that you will end up paying a higher interest rate, or might have to go to a bad credit lender to get approval for a loan if your score is very low.
The Smarter Loans Staff is made up of writers, researchers, journalists, business leaders and industry experts who carefully research, analyze and produce Canada’s highest quality content when it comes to money matters, on behalf of Smarter Loans. While we cannot possibly name every person involved in the process, we collectively credit them as Smarter Loans Writing Staff. Our work has been featured in the Toronto Star, National Post and many other publications. Today, Smarter Loans is recognized in Canada as the go-to destination for financial education, and was named the “GPS of Fintech Lending” by the Toronto Star.