Auto Loans 101: How Vehicle Financing WorksSep 17th, 2020
For many Canadians—especially those living in Sudbury—a vehicle is an essential need. Whether you’re using it to get to and from work, or using the vehicle for your job itself, our geography and climate make relying on public transport a sometimes difficult and often uncomfortable proposition. However, buying a vehicle isn’t just as easy as walking into a dealership, picking one, and then driving out (though we’re happy to share our tips on buying a vehicle).
A major deterrent in this is that the majority of Canadians don’t have the kind of savings that allow them to outright purchase a vehicle. Sure, you might’ve bought your first car at 16 for $2,000 you saved up from your part-time job, but when you’ve got to pay rent and bills that proposition becomes a bit more difficult: enter vehicle financing. One of the two most common methods of purchasing a vehicle (alongside leasing), financing consists of buying a vehicle on credit and making monthly payments until you’ve paid off the loan entirely. If this is something you’re interested in, read on to learn more about how vehicle financing works.
How vehicle financing works in Canada
To finance a car in Canada, you need to find a lender that will give you credit equal to the cost of the vehicle—or the Principal. A lender can be any lending institution such as a bank, credit union, car dealership, or any other business capable of lending you money. The vehicle itself is considered as security for the loan, so in the event that you stop making payments or default on the loan the lender can repossess the vehicle to cover the remaining debt owed on the loan. There’s three important terms to be aware of when it comes to vehicle financing:
The term is the overall length of time you have to make payments on your vehicle loan. Automotive terms in Canada can range from 12 months all the way to 96 months, with pros and cons to both shorter and longer terms.
The longer the term, the smaller the monthly payment you need to make. However, longer terms can also come with higher interest rates, meaning you’ll end up paying more over time to own said vehicle. The most affordable term usually falls in and around the 60-72 month mark, balancing a smaller monthly payment before seeing higher interest rates.
The principal is the total amount you paid for the vehicle you’re financing—excluding interest. This is the amount that you’re given a loan for, including all fees, taxes, as well as any add-ons you’ve purchased. The more expensive the vehicle, the higher the principal. A higher principal means that you’ll either need to make larger monthly payments, or you’ll need to take on a longer term (and risk paying higher interest rates).
Interest rates are the third aspect of vehicle financing that you’ll want to take note of. A higher interest rate will result in you paying more above the principal over time, while a lower interest rate will allow you to either spend less or fit a more expensive vehicle in your budget. The bill of sale will actually show you the Total Cost of Borrowing over the entire term of your loan, by calculating the monthly interest rate based on the principal of the vehicle and multiplying that by the term of your loan.
Interest rates will vary greatly—depending on your credit history—ranging from 0% to 5.95% on new vehicles, and all the way from 3.95% to up to 29.95% on used vehicles. This is because used vehicles generally cost less than new vehicles, and dealerships need to make some money back on a vehicle after buying, refurbishing, and storing it (not to mention advertising, along with other dealership overhead).
What’s better, leasing or financing?
This is a complicated subject (warranting its own blog post!), but the answer is: it depends on your situation. Leasing a vehicle may allow you to upgrade it more regularly, or to have a vehicle for a shorter period of time. When leasing, you generally won’t have to pay for the vehicle’s depreciation, but then again you won’t own it either. That means you won’t gain any equity from the payments you’ve made—you’ve essentially been renting.
However, financing a vehicle means that you’ll own it outright at the end of your payment schedule. So for someone that plans on owning a vehicle for a long time, needs to drive lots, or generally takes excellent care of their vehicle, financing a vehicle will allow you to gain equity on the vehicle. This means that you can sell it down the road if you like, and make some of your money back—depending on how the vehicle’s value has depreciated over the years.
Why finance with Palladino Lending Solutions?
Here at Palladino Lending Solutions, we pride ourselves on helping our customers find the right vehicle for their needs. This not only means finding a vehicle that suits your lifestyle, but also one that suits your budget. Our proprietary iDealerPlus software allows us to match your needs with a vehicle from our massive inventory (11 dealerships and counting!), in order to keep the principal low while still getting you behind the wheel of the right ride. On top of that, our credit specialists will work with you to ensure that you’re choosing the right term, as well as giving you a few helpful pointers in order to improve your credit.
Best of all, if you have subprime credit our Return to Prime program will reward you for making your payments on time by lowering your interest rate year-over-year. This will allow you to save more, and rebuild your credit over time.
So if you have any questions on where to start, or you just want to begin your financing journey today, give us a call or click the link below to fill out our secure online credit application form!