Car Loans

Purchasing a vehicle is a decision that should only be made after careful consideration. For most car-buyers, a major consideration is how to finance the purchase.

Most car buyers borrow money for a vehicle purchase. Some choose to use a personal line of credit or arrange financing at their own financial institution, but many have the dealer arrange financing.

Having the dealer arrange financing often makes sense because dealers often have access to numerous lenders that may provide terms or rates unavailable elsewhere. But this doesn’t mean car buyers shouldn’t carefully consider what is being offered and take steps to ensure they are getting the best possible finance rate and terms.

When a consumer is trying to decide which finance option is best for them, they should remember to look at the big picture – the monthly payments, the selling price of the car, and the cost of borrowing – to know whether the deal is in their best interests. It’s not necessarily about getting a “good deal” or a “bad deal”, rather a car buyer should ensure they are satisfied with all the terms of the purchase and confident they’re making an informed financial decision.

Understanding your creditworthiness

The terms and rates available to you will be based largely on the vehicle being purchased and your creditworthiness (credit score).

Individuals with a good credit score are typically offered, or can negotiate, the best rate/terms available. Before applying for a loan, you should learn your credit score by consulting a credit bureau.

Two commonly used agencies (credit bureaus) in Canada are:

Compare lenders

Before visiting the dealership, contact your financial institution and inquire about the terms and interest rates they can offer. This allows you to comparison shop with the financing available at the dealership.

Are all credit offers the same?

Not necessarily. If a dealer is arranging financing, they may submit your loan application to one or more financial institutions or lenders. So, a car buyer could be approved by multiple lenders, potentially with different terms or interest rates.

Car buyers should ensure they know who their loan application was submitted to. If the application was submitted to multiple lenders, consumers should enquire about each lender’s offered terms/rate. It is important to know that multiple credit applications can negatively affect a borrower’s credit score.

It is also important to understand that dealers are commonly paid a fee, often called a reserve, by lenders for arranging financing. These fees can vary significantly. Loans with higher interest rates often provide dealers with higher fees.

Car buyers need to make sure they are getting the best financing rate and terms possible, not necessarily the rate or terms that provides the dealer with the most lucrative fee.

Credit applications – verify the information’s accuracy

Credit applications at dealerships are usually completed electronically. It is important that the information provided in the application is accurate.

There have been instances of dealers (and/or car buyers) inflating incomes or minimizing debts in an effort to ensure an application is approved. This is not only unethical, it is illegal. You should ask to carefully review the information on the application before allowing the dealer to submit it. You should also request a copy of the loan application.

Loan agreements/contracts

It is common to sign the loan agreement or contract when taking delivery of your vehicle. Car buyers should carefully read the entire agreement and ensure the stated terms and rate on the contract match what was promised.

If a dealer or salesperson makes a verbal promise (for example, if all payments are made for the first 12 months the loan term/rate can be renegotiated), get it in writing! Make sure the promise appears on the contract that you sign. This provides transparency and protection.

Long or extended-term loans – are they right for everyone?

Many car buyers mistakenly shop for a vehicle based on a low monthly payment rather than the actual price. Some of these consumers find themselves financing a vehicle over extended terms (84-96-108 months).

Before agreeing to an extended term loan, car buyers should learn more about the potential dangers of negative equity.