The Ultimate Car Loan Application Guide
Buying a car can be an emotional experience and it’s easy to forget about all the paperwork and financing that’s involved. For first-time or inexperienced buyers, it’s very important to know the facts about leasing, purchasing, or refinancing that special car you’ve had your eye on. If you go in prepared, you can leave with more money than you’d think.
This guide will detail how you can get the absolute best deal to finance your vehicle, including the variety of loans, popular questions, and all the necessary steps to secure the best financial arrangement.
First off, there isn’t simply one type of car loan out there. The financing option will depend greatly on your personal financial situation, what payment plan you are comfortable with, and your desired timeline.
The following are the types of lending options you are going to encounter:
- Previously-Owned Car Loans. These loans factor in the age and kilometers that are driven on your vehicle when determining your loan term as well as the interest rate.
- New car loans. Similar to used car loans, these loans from a dealership or lender are used to cover the cost of the new automobile.
- Buy-here-pay-here loans. This financing option assists people with poor credit by having the dealership handle the financing directly – the tradeoff being high-interest rates and hidden agreements.
- Private car loans. These permit you to purchase a vehicle from a private seller rather than a dealership.
- Lease buyouts. This type of financing allows you to pay your fee once you are at the end of your lease agreement so that you can purchase the remainder and own it completely.
- Auto refinancing. This allows you to trade in your existing car loan to reduce your payments, ultimately allowing you to pay it off quicker.
How Much Is the Average Car Loan?
When it comes to how much a car loan costs overall, it comes down to the three following factors:
- Interest rate. A percentage of your outstanding loan charged by the financial institution or lender, then combined with the current principal owing. You will find a great variance between car loans on offer, with rates as low as 0.99% and up to 13% or even higher depending on the loan type.
- Loan term. This is the amount of time your contract allows you to pay off your loan completely. With a short term loan, your monthly payments will be higher but you will find you save money overall due to fewer interest payments. It’s recommended that people make the highest payments they are comfortable with to reduce the overall cost.
- Fees. These are fixed additional charges added on top of the cost of your loan that you pay back concurrently. Your loan’s APR is its annual fees and interest rate as a percentage.
Learn about Taxes, Rebates, and Down Payments
After you have figured out your loan terms and rates, you next need to look at how many upfront costs there are. You should also take this opportunity about any rebates you might be eligible for. Consider the following:
- Rebates. If you’re financing through your dealer, inquire about cashback discounts. The categories you will need to know are low-interest dealership financing and special leases. Rebates from the Government for hybrid vehicles are also available in most provinces and territories. Make sure to know about these before going in.
- Provincial Sales Tax. Each province and territory has different sales taxes, so research online or check with Service Canada to know which ones apply to you. You can expect them to be anywhere between 13-15%, so factor this into your costs.
- The Down Payment This refers to the amount you are expected to put down at the time of purchase. A solid downpayment will be between 10%-20% of the total cost. Some dealerships have $0 down but expect to make higher monthly payments. Often if you are trading in a car at the time of purchase, you can put that towards your down payment.
Be Wary of 0% Financing
It’s generally accepted that 0% financing is widely regarded as an advertising gimmick that automobile brands use to lure in customers. While many dealerships offer this type of financing, they are not always easy or the best option for a first-time buyer, especially if they can be avoided.
Most car buyers will not qualify for these loans, and it’s estimated roughly 10% of applicants qualify. If you pass the credit check to achieve this variety of loan, it still might not be worth it in the long run. Additionally, these loans tend to have a shorter timeline which means higher monthly payments. You can also forget about cash-back rebates or any sort of wiggle room in regards to negotiating the price.
Lastly, it is common for these deals to be canceled with even one missed payment, putting you at higher risk. For this reason, many decide to go for the car loan with interest plus higher monthly repayments.
Find the Best Car Loan for You
Before you start shopping around for lenders, start by calculating your affordable down payment, maximum monthly payments, the tax, and any extra fees.
Frequently banks, credit unions, and online lenders will require borrowers to have a car in mind before even applying. Conversely, dealerships usually ask you to come into the showroom and shop around with the assistance of a sales associate. No matter what you decide to do, it’s most sensible to do your research beforehand and go in with at least a general idea of what you want.
9 Questions to Ask to Get The Best Possible Loan:
Leasing or Buying: Which is Cheaper?
It’s very important to keep in mind that the value of your car decreases over time, which means there’s the strong possibility that leasing may be more expensive than simply buying it outright, especially if you expect to use it for a long time.
Am I Eligible for a Loan?
Be aware of your own credit rating and have a general idea of what rates you can expect, since there is no use applying if you know you won’t meet the minimum requirements. This information can be found online from most lenders and can save you a lot of time down the line.
What’s the Down Payment?
The most common down-payment is 10%, but some lenders have been known to charge more. Shop around and find a lender that fits your financial situation.
How Long Do I Need to Keep Paying?
Do you think that the terms of the loan are something you can keep up regularly and for the long term? Think about any lifestyle changes you may want to adopt to make this more comfortable.
How Much Can Be Borrowed?
Does the loan cover the entirety of the car you have your eye on? The dealers will most likely attempt to upsell you, so be sure to stay within your means and what you decided on beforehand.
What are the Fees?
Some lenders charge additional fees for taking out a loan, so be sure to read the fine print.
How Competitive are the Interest Rates?
If the rate is advertised at a maximum rate, that’s a red flag. What’s worse is if they fight you on disclosing the interest rate at all. Be cautious of them not being upfront about these basic facts.
How is the Lender’s Online Reputation?
There is a plethora of review sites, forums, and platforms for loans and lenders, sometimes disclosing details that aren’t obvious at the start. Look for things like customer service, changes in rates, and hidden fees. If you get the feeling something seems shady, move on.
3 Additional Financing Warning Signs
Lenders or dealers promoting any of the following perks should raise red flags:
- The car can be ‘Taken Home before Approval’. This is a trick called a Spot Delivery Scam. The dealer will allow you to take the car home while running their paperwork but will contact you later to inform you that the financing fell through and you now need to renegotiate your loan at a much higher price.
- No credit check. Dealerships often don’t run a credit check for buy-here-pay-here (BHPH) loans as they are designed for buyers with poor credit. Lenders who advertise their lack of credit checks should be read as shady, or at least full of sneaky fine print.
- Credit Score Fabrication. The most egregious scam is where lenders straight-up lie about your credit score if you ask them to do it, forcing you to pay a higher interest rate. This is why it is so important to be aware of your credit score beforehand.
Am I Ready to Apply for Financing?
- You’ve selected more than one vehicle.
- You know exactly how much you can afford for a down payment and a comfortable monthly repayment.
- You’ve looked into any additional provincial sales taxes.
- You’ve compared several lenders and chosen the best deal.
- You have looked up your credit score and recorded it.
I Am All Set to Apply. What’s Next?
The loan application process is as varied as the types of loans you can apply for. If you are financing through the dealership, most of these steps will not apply and you can go straight to the dealer to start the process. For everyone else, read below.
Research the process for the lender in question, which can either be found online or in-person wherever their location is. The preapproval process usually starts with a credit check, which can take anywhere from minutes to hours depending. This preliminary process may also involve you having already selected your car, which you should have done by this point.
Select the Type of Loan
Once the preapproval process is complete, the lender will inform you of what loans you qualify for. Keep your finances and your plan in mind as you select which loan is best for you.
Provide Required Documentation
The lender may request to verify your income, assets, residence, and more. If this process is being done online, you can usually submit PDF copies of these documents.
Understand the Agreement Prior to Signing
You will most likely need to sign your loan agreement before purchasing from the dealership. If so, carefully examine the terms & conditions and don’t be afraid to ask questions or look up anything you are unclear on. No matter what, never skim it or sign without fully comprehending the terms.
If you Don’t Have Insurance Currently, Explore the Competition
It’s very important to have your insurance sorted out before purchasing your vehicle. It’s most sensible to get your insurance from a third party as opposed to the dealership, who often will not give you the best rate. A good tip is to look into any existing insurance you have and see if you can get a deal on adding vehicle insurance to it.
Visit the Vehicle Dealer
With all the preliminary research and financing figured out, you can enter the dealership and begin speaking with a sales associate. Tell them everything you have already arranged and begin examining the cars you most likely already have in mind.
Negotiate your Final Price
Many people struggle with this step, especially if they are first-time buyers. This step, however, is critical to getting the price down. Don’t worry, negotiation is expected in these situations and happens every day.
Read the Papers Carefully and Sign
Look out for extra unnecessary fees and confusing language, just like you did during the financing process. Once again, don’t worry about asking questions or taking your time to look things up. If you feel as if you are being rushed through the process, remember that you always have the option to leave.
After signing your paperwork and getting the deal squared away, both your lender and the dealer will arrange the technical details behind the scenes.
Register your Vehicle and Finalize Ownership
For a nominal fee, you can register, obtain ownership and receive registration plates at any Service Canada location. This will not be necessary if you are trading in an older car.
What Documentation is Required?
Have these three documents ready when you are applying for a vehicle loan:
- Your most recent driver’s license. You will probably be asked to present your license, a photocopy of it, or simply the numbers on it. The safest bet is to have a photocopy ready, however, they can often do it there.
- Your insurance card. Occasionally lenders will require you to have insurance prior to receiving the loan. This can usually be discovered during the research process.
- Employment verification. Along with the credit pull, you may be required to offer proof of employment in the form of a pay stub or other proof of deposit.
5 Reasons Your Loan May Be Rejected
- Bad or Nonexistent Credit. The credit check may reveal insufficient credit for any loans offered.
Tip: Research your own credit score and find out any restrictions before approaching the lender.
- Errors in Paperwork. Any mistakes or incomplete sections of your application could easily lead to swift dismissal.
Tip: Review your application at least twice before submitting it, and see if you can have someone else look it over.
- Financial Hardships. Loss of job, house foreclosure, bankruptcies, and debts that went to creditors make you look like a risk to lenders.
Tip: Put some time between your most recent catastrophe and a loan application, even if it involves you recently paying off a debt to creditors. You can always search for lenders who have more lax credit requirements, but you will want to have a close look at the fine print on those applications to avoid being taken advantage of.
- Your loan request was too steep. A lender may reject your application if they either think you are being too greedy or don’t appreciate the seriousness of the repayment of the loan.
Tip: Make certain that you are being realistic with the car you want, and that the loan covers only that price range.
- Inconsistent income. This can be a problem for freelancers, seasonal workers, or sometimes tradespeople. Unpredictable income can make lenders nervous.
Tip: If you are a freelancer or any sort of profession with inconsistent schedules, see if you can either stick with it for a few years to show some form of consistency or get a part-time job to establish a minimum baseline of income.
I got my car loan. What happens next?
Congratulations, you’ve got the car of your dreams. If you’ve followed all the steps up until this point, you will have a comfortable monthly repayment plan in place. Most lenders will offer automatic payments from your financial institution and account of choice, so regular payments should be simple. For the first few months, keep an eye on your account to ensure there are enough funds and avoid any missed payments or possible penalties.
Frequently Asked Questions
How Easy is it to get a car loan?
The difficulty of achieving an ideal car loan depends on multiple factors. As we’ve explained above, your credit rating, proof of income, financial trustworthiness, and size of downpayment are all factors. If you have good credit, a stable job, and money for a sizable downpayment then the loan should be relatively easy.
In reality, it’s all up to the lender, which is reactive to the economy at the time. If you were to seek out a loan and the industry you are in is experiencing heavy layoffs and appear sin flux, lenders may be more hesitant. Similarly, during a recession, lenders will be equally cagey about offering loans.
What’s the ideal annual percentage rate (APR) for a used car?
It all comes down to your financial situation and credit rating. If your credit is exemplary, a good APR could be 0.99% to 4% for a pre-owned vehicle. If on the other hand, you have poor credit, you could be looking at a minimum of 12% or even higher.
Are Car Loans secured loans?
The short answer is yes, but not always. Most car loans are directly connected to the value of the vehicle, which could be repossessed if payments cease. In fact, you technically do not fully own your car until it is fully paid off.
Do I have to be a Canadian citizen to apply for a loan?
The general rule is you must be a Canadian citizen or permanent resident to qualify for vehicle loans. However landed immigrants can sometimes be approved for car loans, while the process is more complicated, and the rates may be higher.
Can my vehicle loan be refinanced?
Yes. Refinancing can offer you lower monthly repayments and a better overall rate. This option is offered by most lenders, and you ought to research it beforehand.
Am I required to submit a down-payment for my loan?
There is no general answer for this and depends on the lender in question. Do your research beforehand.
Is it smarter to lease a car before purchasing it?
Consider leasing your vehicle if you’re thinking about trading in your model for a newer one every couple of years – just remember you will never have ownership of this vehicle, and the value of the vehicle decreases each year. With lease agreements, the monthly payments tend to be lower but are far more difficult to get out compared to selling a car that is being financed.
What credit score to I need to get 0% financing?
Only those with exceptional credit scores – between 800 and 900 – can achieve 0% financing for the majority of lenders or dealers. Other aspects, such as your income, debt, and assets will be weighted when deciding your interest rate, as well as the amount of the downpayment. This is why it’s crucial to understand your own personal finances before approaching dealerships or lenders.