Questions to ask before you get a car loan in Canada
If you’ve recently moved to Canada and you’re about to finance a vehicle, begin by answering these questions—with the help of an expert if necessary.
1. What are my financing options?
These will include banks, credit unions, online lenders and auto financing companies owned by dealerships or automakers. Remember, deciding on a car loan is like choosing the car you want—it’s a good idea to shop around for the best deal. Be sure to consider multiple options for car financing, including loan programs offered by major banks that are specifically for newcomers.
2. Can I use a loan or a line of credit to pay for a car?
“A car loan is secured against the vehicle, meaning that there is less risk for the lender, who could repossess the car if the loan defaults,” Gray explains. “A personal line of credit is unsecured, and a strong credit score and solid work history is required. The amount of the line of credit is based on your qualifications, and it can be increased as your credit score increases. The interest rate is variable, and you have the flexibility of paying the interest only (required) or interest and principal. The interest rate can be higher than the car loan’s, depending on your credit history. You can purchase anything you want using a line of credit. The smart choice depends on your situation and your borrowing qualifications.”
Read: “New to Canada? A new way to transfer your credit score”
3. What is the interest rate?
Understanding the interest rate on a car loan, often expressed as an annual percentage rate (APR), is crucial to determining the overall cost of borrowing. A high APR or percentage means you’ll pay more in interest over the life of the loan than with a shorter-term loan. Shorter loans tend to have lower interest rates; the same is true for loans with more frequent payment terms, since bi-weekly payments can reduce interest costs versus monthly payments.
Know, though, that the percentage rate only tells part of the story. Understanding the interest cost, or the dollar amount of interest you’ll pay beyond the initial loan amount, is important. You can find out this amount by checking your loan agreement, asking your lender or plugging loan data into an online loan calculator.
4. Can I afford to buy this car?
Let’s say you’re buying a compact car priced at $30,000. That’s not the only cost. You’ll need to spend a few hundred dollars on fuel each month, plus a few hundred dollars on insurance each month, not to mention the cost of oil changes, servicing, maintenance, and a winter tire and wheel package.
When considering a new or used car or truck, be sure to factor all of these costs into the equation and adjust your budget as necessary.
There are two other points to consider.
First, add-ons like winter tires and wheels, accessories and extended warranty coverages can often be rolled into your loan financing, spreading their cost out over time. So, yes, you will pay interest on those items, too.
Second, some buyers prefer to make a down payment towards their car by paying some portion in cash up front, and then financing the remainder. Making a down payment allows you to take out a smaller loan, which means lower regular payments and interest costs.
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