The average new car in Canada is well over $30,000 so unless you have that much cash inside your bank account, you will need to get a car loan. There is a variety of different auto loan providers in Canada to choose from but if you do not follow these suggestions you could end up overpaying. If you understand car loans in Canada, it will give you a huge advantage in securing a great deal.
Prime, sub-prime and private lenders
The best start to understand car loans in Canada is remember that auto lenders will fall into one of the following 3 categories. The first category is prime lenders who target Canadians who have fantastic credit and well-documented history of paying their bills on time for many years.
These prime lenders can offer loans at very low rates because they (the lenders) generate their money by doing business in volume. There is an abundant supply of customers available to these banks and the bank can borrow money from the Bank of Canada at prime which is currently 2.5%.
With sub-prime lenders, are businesses that pool together their capital and offer loans to consumers who had credit issues in the past and would not qualify for a prime car loan. While credit issues are the primary reason a borrower would fall into this category, self-employed borrowers would also have issues getting a loan at prime.
These sub-prime lenders are not able to borrow from the Bank of Canada at prime rates, so they need to get capital from outside investors. The only way these organizations can get capital from outside investors is by offering high-interest rates which you the borrower has to pay.
The default rate on sub-prime auto loans is considerably higher than prime, so lenders have to factor that in when setting the interest rate to protect their investors.
Private lenders as the name implies are investors who will help lend money to finance the purchase of a car. These individuals will not lend more than 65% of the current fair market value of the car. The lender expects the borrower to put some serious money down to make the deal happen. In the event the borrower does not pay, the borrower can sell that car to recover their losses.
Importance of having a good credit score
We covered the 3 main types of auto loan providers in Canada, which one you deal with comes down to your credit score. If you are not sure where you stand, some apps will let you check your credit score for free.
Finding a reputable car dealership is vital to get good value for your money. When assessing the various dealerships in your area, you should confirm they are fully licensed and bonded. There are laws in place that regulate car dealerships.
Look at the customer reviews that were recently uploaded from satisfied clients. These reviews should be available on social media and Google.
When you have found a dealership that has a great reputation, you should go and meet up with them. The dealership can help you with finding a suitable car and also get the financing in place. All you need to do is bring along your income documents and make sure your credit score is in the “good” range.
We hope this article helped you understand car loans in Canada a little more clearly! 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!
For any questions or concerns, please don’t hesitate to contact us here!