Many young drivers save up to buy their first car. This is a great way to learn how to budget—and avoid going into debt. But when it’s time to get a car that costs a little more, credit offers more flexibility. Why should you use a loan to get the car you want and—even more importantly—how can you do it? We’ve got the answers to your questions.
Personal loans and auto loans: What’s the difference? There are actually a lot of differences between these two types of credit. One is that you can get an auto loan directly from your dealer, but you have to apply for a personal loan from a financial institution. Another big difference is the interest rate. Rates are lower for auto loans, because they’re considered instalment sales contracts, and the vehicle acts as collateral on the amount you borrow. Auto loans are a great idea when you’re buying a more expensive vehicle directly from the dealer. The credit application process is handled onsite, and dealers often have the best interest rates.
Auto loans don’t come into effect until the car is yours. That means you only start paying it back once the vehicle has been delivered. Personal loans, on the other hand, come from your financial institution and don’t depend on the delivery of your vehicle. If your application is approved, the loan is opened, the amount is transferred to your bank account and you’ll need to start paying it back right away.
Why go with a personal loan? In some situations, personal loans are the right choice, like when you’re buying your car from an individual. Once you’ve agreed on the purchase price, you’ll need to apply for a personal loan from your financial institution. A personal loan is also your best bet when you’re buying a car for less than $7,500 from a merchant or dealer. Generally, merchants only offer loans for purchases over $7,500. To sum it up, we recommend a personal loan if you’re buying a less-expensive car, or one from an individual.
If you've never bought a car from a dealer, you're not alone! What happens after you pick out a car? First, the sales rep will take you to the finance and insurance office. Then what? Here’s what you can expect:
1) The merchant will ask you how you’d like to pay for your car. Some people pay cash, but most buyers choose an installment plan. The merchant will make you an offer. That’s when you will have to negotiate the terms and conditions you’re comfortable with.
2) They’ll contact a financial institution so that they can offer you a loan. Don’t be afraid to tell your merchant which financial institution you want to do business with.
3) The financial institution will check your credit history. Lenders always analyze the borrower's credit before authorizing a large transaction. They need to know if you’re in debt, and if you’ll be able to make your payments. The financial institution will have access to this information through your credit report.2
4) You’ll sign the contract. This step only happens if your loan application is approved. Before signing, make sure you double-check all the information that appears on the contract, including your name, address, loan amount, etc. Payment terms can be modified after the fact by your financial institution, but it would be hard to change the name of the borrower!
5) This is when you’ll start paying it back. Once the contract is signed and you’ve got the keys, you’ll begin making payments according to the schedule you chose (every week, every two weeks or every month).
How can you make sure you have an excellent credit score? First of all, you need to understand the variables used to calculate it: your payment history, how much debt you’re in, how often you’ve applied for credit, the types of credit you use, your credit history and any bankruptcies you’ve declared.3 You can—and should—use these variables to your advantage:
1) Avoid applying for credit too frequently. This is an aspect people don’t always understand. If you apply for credit many times, or your credit application is refused, your score goes down and any future applications are less likely to be approved. Shop around at different dealers, but don’t apply for a loan until you’re sure you want to buy.
2) Stay within your budget. Set a budget that takes into account the loan term, the total cost of the vehicle, the amount you’ll pay each month, the interest rate, any credit fees (insurance, registration fees, etc.) as well as maintenance fees. There are many costs associated with purchasing and financing a car. Make sure that you take all of these variables into account, and that you fully understand the financial commitment you’re making. This way, you’ll avoid any unpleasant surprises.
3) Don’t accumulate debt. Your total level of debt is based on more than just how much you owe: it’s also based on the number of debts you have, since interest accrues on each one. Make sure you take this into consideration before buying something on credit. Having a bunch of credit cards is a very common reason people fall into this trap. It’s a good idea to have just one card if you want to keep your credit score up.
Having a poor credit rating will limit your options and could lead to higher interest rates when you’re shopping for a car. However, there are ways to fix it! Good credit is something you can build. Here are some tips:
1) Buy on credit. Good credit doesn’t just mean you don’t have any debt. It means that you’ve proven that you can handle debt appropriately. Responsible credit card use—paying off your balance in full every month—is an easy way to improve your score.
2) Get help with your first loan. Ask a family member or spouse with a good credit rating to co-sign your loan. This will make it easier to get your application approved, so you can start building your credit history. If you don’t have someone who can co-sign your first loan, make sure that you have a down payment (from 10%-20% of the total amount).This will make it easier to get approval for your financing. Choosing a shorter term can also help.
3) Build good payment habits. Easier said than done! It all comes down to budget management. How many bills do you have to pay? Do you have the money to pay them each month? Can you cut any of your expenses? Bills that are paid within 30 days have a positive impact on your credit score.4 If you take longer, this will gradually have an impact.
4) Be patient! Major debts on your bank account or credit card may seem intimidating, but they’re also a chance to build your credit. Showing your capacity to carefully pay debts over a long period of time is an excellent way to build your credit history. There’s no simple trick to building a good credit score in a short period of time. Opening multiple accounts and signing up for several cards will actually have a negative impact on your file.
Congratulations on deciding to get a new car! Here are some things to remember when applying for a loan:
Only apply once. Shop around, test drive as many vehicles as it takes to find the car that’s right for you, compare offers, etc. But remember that it’s important to only apply for credit once—when you’re ready to buy. Applying for credit with several merchants could affect your score, even if you’re approved for all of them, since the number of applications will be included in the calculations.
Calculate the total amount to pay. Monthly payments over 7 years will be lower than over 5, but will it be more expensive in the long run, once interest is included? Calculate the total amount to be paid over your entire term, including interest, and you’ll be able to make an informed decision about your financing. Feel free to check out our loan scenario calculator for help!
Choose payment terms and conditions that you’re comfortable with. You can choose how frequently you make payments: every week, every two weeks, or every month. Keep your budget in mind and don’t forget that the future is full of surprises. It may be tempting to pay off your auto loan quickly, but if you pay it off at a steady pace, you’ll have the flexibility to make other purchases and build your credit score at the same time!
Now you have a better idea what automobile financing is all about! All that’s left is to put your knowledge into practice when buying your next vehicle!
1FR: https://www.caaquebec.com/fr/sur-la-route/guide/acheter-ou-louer-mon-auto/financement-on-procede-comment/
ENG: https://www.caaquebec.com/en/on-the-road/guides/buying-or-leasing-my-car/financing-how-to-proceed/
2FR: https://www.educaloi.qc.ca/capsules/le-dossier-de-credit
ENG: https://www.educaloi.qc.ca/en/capsules/credit-reports
3FR: http://www.lesaffaires.com/blogues/daniel-germain/comment-avoir-une-cote-de-credit-parfaite/581431
4FR: http://www.lesaffaires.com/mes-finances/consommation/six-facons-d-ameliorer-votre-cote-de-credit/573310
