On average, Canadians owe $20,000 on their car loans. With longer loan terms and higher interest rates, it seems like no one can get out of the car loan rut.
Often, Canadians don’t understand the terms that they’re agreeing to when they pick up one of these loans. As such, they don’t realize how much they’re spending on interest and how long they’re going to be paying the car off.
To understand all of these terms, we have to get down to the basics: what is a car loan? To learn everything you need to know, keep reading.
Understanding Car Loans
A car loan is a type of personal loan. This means that the lender makes an agreement with you to finance your vehicle. In turn, you agree to a set of specific terms and conditions.
Once you get the funds from your lender, you can buy the car. You’ll then have to make regular payments to your lender over an agreed-upon amount of time.
Terms and Conditions
The long list of terms and conditions tells the borrower all of the details about their loan:
- The exact amount the borrower is borrowing
- How long the borrower will be making payments (term length)
- The interest rate associated with the auto loan
- The down payment that the borrower will be making
- The insurance requirements associated with the auto loan
- The instructions for how to pay off the loan
- Other information pertinent for the borrower in relation to the auto loan
Many borrowers glaze over the terms of the loan, but you should avoid doing this. You should always read the terms and conditions before you sign anything.
You should also make sure to ask any questions that you have, regardless of how simple you may think they are. It’s important that you understand every line.
Interest Rate vs APR
The interest rate tells you how much your lender is charging you for borrowing their money. They may list this amount as an APR (annual percentage rate). This includes any additional fees.
Because of this additional consideration, APRs are more accurate than interest rates on their own. With the APR, you’ll get a better idea of what you owe over the entire life of the loan.
Down Payment
The down payment is the amount of money that the borrower puts down on the vehicle before using their auto loan to pay for the rest. Sometimes, the down payment may be the value of the vehicle that you’re trading in.
In most cases, lenders notate down payments as percentages of the total auto payment. For example, a 20% down payment on a $20,000 vehicle would be a $4,000. The remaining $16,000 would fall under financing.
Secured vs Unsecured Loans
Car loans are a kind of personal loan, but financial experts divide these into two further categories: secured personal loans and unsecured personal loans.
Unsecured personal loans don’t have any collateral attached to them. On the other hand, secured personal loans do have some kind of collateral.
Collateral can be any kind of asset or property that a borrower promises to the lender if they were to default on their loan. This means that the lender could seize this property if the borrower were to default on the loan.
Vehicle loans work differently than typical personal loans because they tend to work with collateral, meaning that they are secured personal loans. In these cases, the vehicle itself acts as the collateral. If you default on a vehicle loan, the lender will act by seizing the vehicle.
How to Get a Car Loan
Getting a car loan involves a lot of paperwork and even more patience. The key to getting the right loan is to be proactive about the process.
Consider the finances before you start looking for the car of your dreams.
1. Know Your Credit Score
Before you start hunting for your next vehicle and the auto loan to go with it, you need to know your credit score. Good or bad, your credit score is the key to understanding what kind of vehicle loans you qualify for.
You shouldn’t trust that your lender will give you a fair deal for the credit score that you’re currently holding. Rather, you should do your research about the kinds of interest rates that people with your credit score get.
With your current credit score in mind, you should also consider whether you want to take some time to increase it. By paying off debts and lowering credit usage, you can make the most of your credit accounts. In turn, you’ll raise your score.
That higher credit score can help you get better loan terms. In the long run, you’ll be paying less in interest and less overall for the car that you end up buying.
2. Understand Your Options
Before you sit down to talk to a lender about getting a car loan, you need to understand your loan options. Knowing these ahead of time will help you during the negotiation. And, it’ll almost ensure that your lender won’t try to take advantage of you.
When you’re thinking about the kind of auto loan you want to invest in, you should consider the following loan terms:
- Term length
- Interest rate
- Monthly payment
- Prepayment penalties (if any)
Determine what your ideal loan would be and what factors are most important to you. Write all of your terms down and bring them to the meeting with you so that you have guidelines to work with while you’re negotiating.
While you may not be able to get a perfect loan, you may be able to get close to your terms as long as they’re reasonable for your current credit score.
You should also remember to shop around. Meeting with one lender isn’t ideal if you’re looking to get the best deal.
3. Opt for the Lowest Loan Term
The loan term for a vehicle loan tells you how many months it will take for you to pay your loan off. Opting for the longer loan term may lead to lower monthly payments, but it also means that you’ll end up paying more interest in the long run.
If you opt for a shorter loan term, you’ll pay less interest and less overall. Plus, you’ll pay off your entire loan earlier.
It may take some budgeting, but you should choose the shortest loan term you can. Use a car loan calculator and figure out what kind of car payment you can reasonably afford. Don’t elongate your loan simply because of the lower payments.
4. Increase Your Down Payment
The more you put down on a vehicle, the less you’ll need to finance through the auto loan. Many lenders try to entice you by encouraging a no-payment-down loan.
A down payment of $0 sounds great now, but you’ll pay for it later.
By putting down a larger payment upfront, you’ll be saving a lot on interest. We recommend putting 20% down if you can. If not, you should calculate what a comfortable down payment amount would be for you in your current financial situation.
5. Use Cash Where You Can
Buying a car isn’t just buying the car. Unfortunately, there are a bunch of other fees to worry about:
- Taxes on the sale of the car
- Title fees
- Dealer fees
- Warranties
These and other additional costs of buying a car can add up.
If you can, you should use cash to pay for these additional fees. You could roll them into the funds you’re borrowing for your auto loan, but this would only increase the amount of money you owe.
Paying off these small fees now can lead to a lot less paid in interest later. And, you’ll feel good knowing that you put as much of your money into this as you could afford at the time.
Negotiating Better Car Loan Terms
Like other kinds of loans, car loans are negotiable. But, you have to understand your situation objectively, as if you were the loan officer looking at your loan application.
Consider your current financial situation, cash offers, and loan conditions when you’re negotiating with your lender. If you feel that your current financial situation entitles you to better loan terms, tell the lender that.
If you know what you’re talking about, the lender will be more likely to work with you on better loan terms.
You should also consider talking with multiple lenders about the same loan. You may find that you can get a better deal elsewhere. And, you can use that deal for leverage when you’re talking with other lenders.
So, What Is a Car Loan and Where Can I Get One?
What is a car loan? Well, it’s a personal loan that helps people like you get a car easily. Without having to pay all of the money down, you can enjoy your car sooner with smaller payments over time.
Where can you get a car loan? Look no further than Cars Fast Lending Arch. We can help you get approved for car financing quickly. Apply for your car loan today.
