How Does Car Financing Work?
First, you need to select the vehicle of your choice. It may be a new or used vehicle. After making the choice, you will need to fill out an application for car financing. Most people go to car dealerships like Auto Lending Hub for car financing or alternatively, look for a car loan online or via some bank. Before you can get a car loan, you will need to provide some documents to the dealership like income tax assessments for proof of income, and a driver’s license. The next section will mention all the documents necessary for car financing.
Read More: Does Financing a Car Build Credit in Canada: A Detailed Guide
1. Eligibility
To qualify for car financing, you need to meet some criteria which includes:
- You need to be a Canadian resident.
- You should have a Canadian driver’s license.
- You must meet the minimum age criteria in your province. For example, you need to be a minimum of 19 years of age if you’re in BC.
- You need to show proof of income.
When you’re trying to get car financing done, the approval may take some time. The lender needs to check vital information before the approval takes place, like doing a credit score check and verifying your information. At Auto Lending Hub, you can get your car loan approval within 24 hours. The status of your credit score does not matter when getting an approval for your car financing from our car dealership!
2. Interest Rates
By knowing the interest rate, you will know whether you are being offered a reasonable loan and you will have a good idea of the overall interest payments. Websites of auto financing usually come with a car loan calculator where you can know the duration and interest rate of the loan as well as the cost of the car. It will help with making a sound financial decision before you are choosing to finalize the car financing.
3. Terms and Conditions
It is essential to know the terms and conditions of the car financing because you will be committed to paying back the money for a long time. It usually ranges from 36 to 72 months in Canada, with some even going as long as 84 months. By choosing a shorter term, you will be able to save a lot of money although the monthly payments would be much higher. However, if you choose a longer term, you would need to pay a higher interest, which means you might end up paying more money than you would expect.
Also Read: A Complete Guide To Auto Financing: Drive Your Dream Car Today
4. Choosing The Right Loan Type
There are two types of loans you can choose from, fixed rate loan and variable rate loan. It is important to decide which loan would suit you more as this would impact the total cost incurred to finance your car. Let’s find out about their difference:
Fixed Rate Loan: This type of loan has monthly payments with interest rates which stay the same throughout the loan. The rates might be higher than variable rates in the initial phase however it’s more stable and also predictable. This helps with planning financially and making sure you don’t miss out on any payments in the future.
Variable Rate Loan: The interest rate of this loan changes periodically and is often tied to the prime rate. The monthly payments vary each month the rate adjusts itself. It can go up or down. These loans usually start with a lower interest rate which gradually increases with time. There is no stability as it’s difficult to understand the amount you may need to pay every month.
5. Total Cost of Loan
You should calculate the total costs apart from the price of the car you are about to finance. It helps you to handle your finances with more ease. Additional costs involve the fees, insurance costs, interest rates and taxes for the car loan. Read below to know the full breakdown of costs:
Fees
You will need to pay fees charged by lenders when financing a car. There are usually three types of fees involved: title and registration fees, origination fees and documentation fees. Different provinces charge different rates for title and registration fees. It is usually around 20$-150$ in total. Meanwhile, origination fees are typically 1% of the loan amount and are the flat fee to process the loan. Lastly, there is the documentation fee which covers all the costs incurred by the paperwork and is usually around 300$ in total.
Interest
You will be required to pay an interest when financing a car for a set period of time. The total costs greatly depend on the interest rate charged within a car loan. Make sure to check the interest rate before finalizing your decision.
Down Payment
By opting for a down payment, you can reduce the total amount and interest owed when financing your car. Down payments are a great way to clear out your debt faster and to decrease your overall costs.