When buying a new or used vehicle, one major consideration is how you will pay for it. Most people won’t have enough money saved up to cover the entire cost, so they’ll have to finance part of the purchase. While this is a pretty normal process, there are many questions you should ask to ensure you understand how financing works and how it can benefit you.
What’s the interest rate?
Interest is the fee you pay to borrow money from your dealer or lender for your auto loan. Your interest rate plays a critical factor in your purchasing decision as it’ll determine what your monthly costs are. Every lender has different criteria for setting interest rates, but generally speaking, if you have a good credit history and no other debt, you can secure some of the best interest rates.
How much interest am I paying over the term?
When buying a car, anything can look affordable if the term is stretched out. Instead of focusing on the monthly payment, ask your lender how much interest you’ll pay over the term. Have them calculate it for different terms (e.g. 5, 6, and 7 years), so you can see exactly how much interest you’ll be paying. Once you realize how much money is going to the interest payments, you may opt for a shorter term or even a lower-priced vehicle.
Can I get a better interest rate?
Just about every car dealership will offer financing, but they might not give you the best interest rates. In other words, it pays to shop around. The easiest place to see if you can get a better interest rate is your financial institution. Most of them offer a line of credit or auto loan to their customers. Since this is a loan, you would have to apply formally. The interest rate would be determined by your financial institution’s prime rate, your credit score, income, and other factors.
Is there a discount when financing?
Even though you may be able to pay for your purchase entirely in cash, it may be worthwhile to ask your dealer if there’s a discount for taking the financing option. That’s because dealerships usually go through a third party to finance those loans. Since they’re bringing business to the lenders, they get a commission. In turn, the car dealer could pass on some of that commission to you in the form of a lower price. Assuming you’re allowed to pay off the loan at any time, you could immediately pay off your balance as soon as the paperwork is complete.
Can I pay off my loan early?
Generally speaking, most auto loans allow you to pay down the balance early. That said, you’ll want to ensure you’re allowed to do so and that there are no limits to how much you can repay. Ask if there are any penalties if you pay off your loan early. All of this information is relevant since any additional payments you make go 100% toward the principal balance.
Can I really afford this loan?
Since loans can be stretched over many years to make the monthly payments lower, you need to ask yourself if you can really afford the loan. If you have an auto loan, it’ll affect how much you can borrow for other loans in the future, such as a mortgage. Generally, you don’t want your total monthly vehicle expenses to exceed 10 - 15% of your income. Total expenses would include your monthly loan, gas, insurance, and maintenance. The last thing you want is expensive car payments as it could ruin your monthly budget.
What’s the fine print?
Since every loan is different, you need to ensure that you understand all of the fine print. For example, if you’re offered 0% financing, how long does it last? You should also ask what happens if you miss a payment. Would your interest rate increase significantly? How about extra fees? Are there any? You need to know your loan inside out so you don’t get caught off guard by unexpected costs.
Do I need a down payment?
How much of a down payment you’ll need will depend on the loan you’re approved for. For example, if you’re looking to purchase a vehicle that costs $40,000, and your lender will only let you borrow $35,000, then you need a down payment of $5,000. Even if you're approved for the entire amount, it’s a good idea to have a down payment. By having one, you’ll pay less interest in the long run.
Barry Choi is a Toronto-based personal finance and travel expert who frequently makes media appearances. His blog
Money We Have is one of Canada’s most trusted sources when it comes to money and travel. As a completely self-taught, do-it-yourself investor with no formal training, he makes money easy to understand for all Canadians. His specialties include personal finance, budget travel, millennial money, credit cards, and trending destinations.