Auto loans can be a complicated business and we think informed consumers make happy consumers. That’s why our Cambridge auto loan team came up with a simplified explanation of car loans for beginners.
Because we want you to be completely happy with your auto loan and your new car!
Car Loans for Beginners
Annual percentage rate – APR
Let’s start with the most important, interest. APR, Annual percentage rate is what we are all charged on standard interest auto loans. It is expressed as a number, like 5% APR or something similar.
It’s a calculation of the annual rate you will be charged for the auto loan. It is comprised of the Canadian prime rate plus a percentage the lender includes on top as their profit.
The lower the APR number, the cheaper the loan.
Your credit history is exactly what it says it is. Your history of managing credit. It’s a record of your financial dealings outlining how you paid them, whether you paid on time and how long you had those debts.
As the lender doesn’t know you, your credit report, including your credit history, forms part of their lending decision. Your credit report will also include how much debt you have, how many types of debt you have and some other stuff.
If you always paid debts on time, your credit score will be high as a result. If you missed payments for any reason, it may be lower.
Negative equity is another auto loan term that seems to confuse people. We saw a lot of this in the financial crisis back in 2008, but it still crops up now and again.
Negative equity, also known as going upside down, is when the value of the car you buy is worth less than the car loan you used to buy it. It’s mainly experienced when buying new cars when initial depreciation lowers the value of the car but you haven’t paid enough of the loan off to balance it out.
For example, you buy a car worth $35,000 using a car loan of $30,000. The car depreciates by around 30% in the first year, reducing its value by around $10,000. Until you have paid off that amount, your loan amount is higher than the car’s value.
That’s negative equity.
Negative equity is not a bad thing. It only becomes an issue if you need to dispose of the car quickly after buying it. If you’re planning to keep the car, things will balance themselves out over time.
MSRP stands for the Manufacturer’s Suggested Retail Price. This is a guide price for a car, or any item, recommended by the manufacturer. It isn’t written in stone and can be negotiated.
Some manufacturers prevent dealerships selling halo models for less than MSRP for a certain period of time. This is rare and only ever on selected models.
Otherwise, dealerships and customers are free to negotiate what they think is a fair price for the car.
Are there auto loan terms you don’t understand? Something you would like explained further? Tell us about it in the comments or contact one of our Ancaster auto loan team. Car loans for beginners is one of our specialties!
For those of you who know that you have a challenging credit situation, please visit Dixie Auto Loans where we have a team of credit specialists ready to help you get approved for a car loan today!