There has been a tremendous amount of news coverage on the lack of new and used cars to buy in Canada. Since the majority of us need a car to lead a normal life, we are going to take a closer look at how do car loans work.
Our team outlines a few key things to know about how car loans work in Canada when you’re thinking about financing a new car purchase.
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.
No One Size Fits All Model
There is no one size fits all approach when it comes to car loans. The number of lenders has spiked in recent years and lenders now cater to a specific type of borrower profile.
How Lenders Underwrite Car Loans
We will be speaking in broad terms since each lender will have a nuanced approach to loan underwriting. The first thing lenders will want to know about you is whether you are responsible by looking at your credit score.
Lenders want to see a stable and consistent track record of repayment over time. The way they can identify borrowers who meet the criteria is by targeting those with a credit score over 700. The only way to get a credit score that high is by paying your bills on time for a couple of years. If your credit score falls below that goal, you can repair it by making your payments on time and avoiding taking on excessive debt.
When the lender is satisfied that you are responsible, they need to know if you are earning enough money to service the loan. Your payslip or income tax assessments will show the lender how much you are earning.
The lender will perform a calculation looking at your debt to income ratio and if it meets their requirement of 40% or less, your loan should be approved.
Wholesale Vs. Retail Car Loans
The lenders that you see online are retail lenders, this means the interest rate they charge you will be higher than what you would pay if you were dealing with a wholesale lender.
We all can understand the difference between wholesale and retail pricing by visiting a big box versus a mom-and-pop shop, car loans work similarly.
When you go through a local dealership, you will have access to the most competitive interest rates and top-notch customer service. These dealerships do a tremendous amount of business with lenders all across Canada so you will have no issues securing the most competitive terms.
As an added benefit, the dealerships have new cars in their inventory that you can take for a test drive.
If you are seriously thinking about buying a car, even if you have credit issues, then your best option is to visit a local dealership.
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!