Did you know that about 66 percent of Canadians finance their vehicles using auto loans?
Before you buy a vehicle, you will likely want to have your finances in place. You may need a car loan if you haven’t saved up the cash.
There are many types of auto loans in Canada. So you need to choose the one that best serves your needs and look for a lender that provides it at a reasonable rate.
The kind of car loan you pick will affect the amount of interest payable, the loan term, and the amount of money you can borrow.
Below are five types of auto loans in Canada you should know to help you make an informed decision.
Types of Auto Loans in Canada
1. Secured Auto Loans
For a secured loan, lenders use the asset a person wants to buy as collateral. Lenders use a legal document called a lien to make this process possible.
If you buy your car using a secured loan, the lender puts a lien on your vehicle. But, other secured loans put a lien on other assets besides the car owned by the borrower. If you fall behind on your loan payment, the lender seizes the property on which they have a lien.
Secured auto loans have lower costs and finance charges. On the downside, you risk losing the asset you used as collateral for the loan if you default on payments.
Below are some types of secured auto loans:
Traditional Auto Loans
Traditional auto loans refer to secured auto loans with a lien on the vehicle. New car loans and old car loans fall under this category.
Business Auto Loans
Vehicles purchased for commercial uses often do not qualify for traditional auto loans. Thus, you must get a business auto loan when buying a car for business.
A business auto loan reduces your personal liability. Additionally, with a business vehicle, you enjoy tax-deductible benefits.
When you get a balloon loan, you pay in small installments for the first few years, then make one large payment later. Usually, the lender specifies the time after which you must make the large loan payment.
2. Unsecured Auto Loans
Unsecured auto loans do not need borrowers to put up assets as collateral. Thus, lenders cannot repossess your car or any other assets due to payment defaults. Instead, they pursue borrowers who default on payments through other legal means.
Because unsecured loans carry a greater risk to lenders, they have higher interest rates than secured loans. Lenders also consider your credit score. Thus, consider other loan options if you have a bad credit history.
Some types of unsecured car loans include:
- Personal loans
- A line of credit
- Credit card
An unsecured auto loan is ideal if the principal amount you want to borrow is lower than most lenders allow. Other times, your vehicle may not qualify as collateral. This is common when lenders limit the mileage for vehicles they can finance.
An unsecured loan eliminates this limitation because lenders do not need collateral.
3. Auto Refinance Loans
You qualify for an auto refinance loan if you have an existing auto loan. A refinancing car loan allows you to replace your existing auto loan with a new loan.
An auto refinance loan is ideal if your existing car loan has a high-interest rate and you want a loan with a lower rate. Paying a lower interest rate on your loan helps you lower your monthly payment. A lower rate also means possible savings in the long run.
You may also take a refinancing loan when you want to extend your loan repayment period. A longer repayment period also lowers your monthly payments. Though, your overall cost does not decrease if the interest rate remains the same.
4. In-House Loans
Buy here, pay here (BHPH) dealers offer in-house auto financing. In this case, the dealer selling you a car also offers you a car loan. Most BHPH car lots sell used vehicles and are ideal for Canadian borrowers who do not qualify for other types of Canada auto loans.
Most BHPH dealers do not consider your credit score when deciding whether to award you an auto loan. They consider your income and down payment as the primary loan qualification requirements. Thus, an in-house loan is ideal if you have bad or limited credit.
In-house financing is the fastest way to secure a Canada car loan because you get the financing and complete your purchase in one day. Note that these loans have high-interest rates, strict payment terms, and penalties.
5. Indirect Financing
Indirect financing refers to loans you get through a financial institution that has signed up with your vehicle dealer. In this case, once you shop for a car at a dealer, they help you find a loan to finance it.
This type of financing saves you the hassle of talking to several lenders. Instead, you direct all inquiries to the special finance manager at the dealership.
Indirect financing is ideal for the following types of borrowers:
- Buyers with a low credit score
- Buyers with a limited credit history
- Buyers with a past bankruptcy file
- Bankers with past repossession records
- Buyers with situational bad credit
If you have bad credit, the dealership helps you find lenders that consider other factors besides your credit score.
Your dealer may offer you promotional financing for new cars if you have good credit. Some dealerships even offer 0% APR deals.
A 0% APR deal means you do not have to pay interest on the loan. Hence, you get an auto loan for free!
Choose the Best Types of Auto Loans in Canada
When choosing among different types of auto loans, your credit score is the main determining factor. But, a bad credit score should not prevent you from accessing auto financing.
The CarsFast LendingArch connects car buyers with lenders across Canada. No matter your credit history, we know a lender who can provide the financing you need. We will help you get the best loans with low-interest rates and better payment terms.
Apply for a loan today, and let us help you finance your dream car.