Car prices are rising in Canada, and if you want to realize your dream of buying a new car, you will need to get a car loan. Very few Canadians can pay cash for their vehicle, so you need to familiarize yourself with how car financing works in Canada. Don’t worry. We won’t be using overly technical terms but instead, focus on the nuts and bolts.
It all starts with an application
You will need to fill out an application to determine what type of car loan you qualify for. Broadly, these loans are categorized as prime or subprime.
If you have good credit and a reliable income source, you are classified as prime. Borrowers that have weak credit or hard to verify income will be subprime.
The difference between prime and subprime is the amount of interest you are going to be charged. Borrowers with good credit have access to the lowest interest rates, which means you save more over the life of the loan.
Credit scoring fundamentals
Credit score is a key part of how car financing works in Canada, and your credit score is the first thing the lender will review, each lender will have a particular customer profile they focus on. If your credit score is under 680, then you are subprime and must go through a subprime loan provider.
This would be an ideal time to take a hard look at why your credit score
The credit score is just one component of a car loan. Lenders are going to look at your income. Lenders are going to ask you to provide documents that verify your income. These documents can be pay slips, bank account statements, or income tax assessments from the Government.
Covid-19 has made lenders cautious about issuing new loans, and income verification is one way to mitigate those risks.
After the prospective lenders have assessed your credit score and income sources, the next thing they are going to look at the term or duration of the loan. Most car loans are sixty months, however, the lender could extend the loan tenure up to ninety-six months if it helps reduce the monthly payment.
Keep in mind, the longer the duration of a loan, the more it will cost you.
Finding the lender who will give you the best deal
There are many lenders on the Internet, all advertising the best car loans in Canada. While these websites can provide you with some valuable insight into the average interest rates being quoted.
Your local car dealership will have the most competitive interest rates. In addition, dealerships have the ability to access wholesale interest rates from lenders throughout Canada. The dealership will show you how to rebuild your credit and also give you access to their inventory.
We covered a lot of things in a short amount of time, but now that you know how car loans work in Canada, you should be able to find a competitive deal with ease. In addition, if you follow the credit rebuilding suggestions, you can refinance your car loan to a lower rate in 1-2 years.
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 about how car financing works in Canada, please don’t hesitate to contact us here!