The Five Most Common Car Loans
It’s one thing to know that you’re going to need a car loan for your next car purchase. It’s another thing entirely to know the type of loan you’ll require. Did you know that there are more than five different kinds of auto financing?
The type of loan you’ll get will depend on a number of factors: the car you buy, who you buy it from, whether you already have an existing loan, and how dire your credit situation is.
If you’re not sure about a specific term in the following list, just scroll down to find a handy glossary that explains things in detail.
- NEW CAR LOAN: Self-explanatory. It’s a loan, either from a bank or a dealership, that is used to cover the cost of a new car you’re buying. The obvious benefits of buying new are that you’re getting a more advanced vehicle without wear and tear and better technology. But an added benefit is the fact that you are able to get a car loan starting at 0% interest (on approved credit, of course).
- USED CAR LOAN: Used car loans function the same as new car loans, but the conditions around the loans are different. First of all, used car loans typically don’t start any lower than 4.99%. This is regardless of your credit history. Secondly, lenders factor in the age of the car and the mileage its accrued when giving you an interest rate.
- PRIVATE LOANS: These are loans that allow customers to purchase vehicles from private sellers, rather than a dealership. For example, a car you might find on Kijiji.
- LEASES: For a lack of a better word, leases allow the customer to rent out a vehicle from a dealership for a few years. At the end of the lease agreement, there is a residual amount that the customer can pay in a lump sum to purchase the vehicle outright.
- REFINANCED LOAN: Some places, like MyRide.ca, allow their customers to trade-in the vehicle they’re financing to get a different car with a better finance rate. Refinanced loans often let customers pay off their debt quicker.
How Are Car Loans Calculated?
Every loan is different, and each depends on the customer’s credit history and choice of vehicle. If you’re wondering how much you’ll likely pay for your next car loan, it will be determined based on on three main factors:
- INTEREST RATE: Your interest rate is expressed in a percentage and it represents the percentage of your loan balance that will be charged by your bank or lender and added to the principle value of your vehicle. Rates can start at 0% and go as high as 39% in extreme circumstances. Your interest rate you get is determined by several things: the age of the vehicle you’re buying, your credit history, and whether you’re making a down payment or not. Interest rates are often written as “APR,” or “annual percentage rate.”
- PURCHASE FEES: Lenders will often take a flat fee when negotiating a contract. This fee is added to the loan amount and paid off along with the cost of the vehicle. For example, a lender could have a 2% fee for originating a loan. On a $20,000 vehicle, that’s a $400 up-front fee.
- TERM: Another word for the duration of your car loan. Typically loan terms come in 12-month increments (i.e. 24/48/84-month terms). Shorter loans result in higher payments and lower interest. Higher terms result in smaller payments, but more interest.
Try a Car Loan Calculator
If you want to better understand how rate and term and down payments will affect your future car payments, try using a Car Loan Calculator.
It’s a great tool that helps show that you’re not locked into a set payment at all. You have a lot of options in front of you when you’re deciding on the right car loan for your situation. Play around with vehicle price, interest rate, down payment, and the length of the car loan and see how you can make a $250 payment into a $175 payment under the right circumstances.
Whether you’re trying to pay your next loan off as soon as you can or get a loan with the most manageable payment possible (regardless of term), the above calculator will be a great help.
Common Car Loan Terms Explained
AMOUNT OWED: If you’re in the middle of a finance contract, the amount owed describes the amount of money that is remaining on your contract. So, if you’re on a 5-year term and have been paying for your vehicle for 3 years, you still have two years worth of payments before your car loan is completely paid off.
APR: Another term for “Interest Rate.” For more on interest rate, read below.
BI-WEEKLY PAYMENTS: This is when you make a car payment every two weeks for the duration of your loan.
COST OF BORROWING: This money is required to be paid over and above the principle value of the vehicle. For example: if your interest rate is 4.99% for 60 months on a $20,000 vehicle, your Cost of Borrowing (or the extra amount you will be paying in interest over the course of your car loan contract) will be $2639.98.
DOWN PAYMENT: The amount of money you have agreed to pay up front in a lump sum before the finance contract starts. Down payments are often used to reduce the amount that will be paid during a car loan. Often, a down payment will help low-credit customers get approved for car loans they’ve been denied.
INTEREST RATE: The annual interest for your loan.
MONTHLY PAYMENTS: This is when you make a car payment once a month for the duration of your loan.
NUMBER OF PAYMENTS: The number of payments you will be required to pay to complete your car loan. This number will differ depending on your payment schedule: either bi-weekly or monthly payments.
PRINCIPLE VALUE: The cost of the vehicle you’re buying before interest is applied. Otherwise known as the “Sticker Price.”
REBATE: A rebate is a cash-back discount on a new car purchase. Not all new cars come with rebate incentives, so make sure you ask your dealer about rebates on any new vehicle you’re interested in. Government rebates for low-emission or hybrid vehicles are available year-round in most provinces.
TRADE-IN VALUE: The amount of money your trade-in vehicle is worth. This amount is applied to your next car loan in order to make your payments smaller. However, some people choose to get paid out for their trade-in in a lump sum.
Where You Can Get a Car Loan
There are a number of options available for you if you’re looking to get approved for a car loan. There are the more traditional financial institutions you expect, but there are also some reputable third-party lending companies available, too.
The banks do the majority of the lending when it comes to car loans, but they also control the process in a stricter sense. Working with the banks means a relatively hands-off experience. They’ll take a look at your information, give you a quote for an interest rate, and you basically take it or leave it. There isn’t much negotiating to be had, other than added a down payment to your purchase to help grease the wheels. If you have a good relationship with your bank, this might be the simplest option for you, but it by no means guarantees you the best terms.
Online loan companies can often offer quicker service and more generous lending terms. They typically work with low-credit customers more often than the banks (who tend to finance customers with reasonably mistake-free credit histories). Not all online lenders are created equal, however. Make sure the feel like you can trust the lender you’re working with. That being said, there are many professional, trustworthy online lenders out there, who will go above and beyond the banks to provide you with a better customer experience.
Dealerships will often work as middle-men for the banks, helping to broker your finance deal. But some dealerships will actually finance you themselves, with their own money. If they can, that’s usually a good sign. It shows they’re a strong, successful company with a track record of car loan success.
Documents You’ll Need to Apply for a Car Loan
Most lenders will ask you for three things when you’re applying for auto financing.
- DRIVER’S LICENSE: Not only do they want to make sure you have a valid driver’s licence, but they’ll need your license number to complete the application process.
- YOUR INSURANCE CARD: Not only will you need to prove that you have car insurance before buying a vehicle, but some lenders will require that you have specific types of coverage before approving you for a car loan. Why? If you’re to get into an accident and have to pay a huge repair bill out of your own pocket, that severely impacts your chances of paying your car loan payments on time and in full.
- PROOF OF EMPLOYMENT: Bring your most recent pay stub with you.
Get Started Today
No, you don’t have to buy a car today or even start the financing process. But you can start doing your research to help you decide on the type of vehicle you should be buying.
Take a few minutes to use a Car Loan Calculator in order to figure out what your ideal payment situation will look like. Do you want higher payments and a shorter term? Lower payments and a longer term? How much of a down payment should you consider? How expensive of a vehicle can you afford?
A good car loan calculator can help you make all of these decisions, and more. It should be the first step of any customer’s car loan process.