Buying a vehicle is a decision that should only be made after careful consideration, and for most consumers, one of those major considerations is how to finance the purchase.
The majority of consumers borrow money when buying a vehicle. Some choose to use a personal line of credit or arrange financing at their own bank or credit union, while many have the dealer arrange financing.
Having the dealer arrange financing often makes sense—dealers have access to numerous lenders that may provide terms or rates unavailable elsewhere. But this doesn’t mean consumers shouldn’t carefully consider what is being offered and take steps to ensure they are getting the best possible finance rate and terms.
So to help navigate the sometimes choppy waters of auto financing, we asked the very knowledgeable Director of the Automobile Protection Association (APA), George Iny, to weigh in on some of the most frequently asked questions about car financing.
Many dealers provide great financing for car purchases that would be unavailable anywhere else, but how do I know the dealer is offering me the best possible rate?
First and foremost, know your creditworthiness. Generally, only consumers with a good credit rating qualify for the lowest interest rates. Consider talking to your bank to find out what rate they would provide you for a car loan. This info is good to have on hand to compare to what the dealer is willing to offer.
Many manufacturers also provide financing – sometimes at dramatically sub-vented rates. So according to Iny, when buying a new vehicle, it’s wise to check the manufacturer’s website to see what rate is being offered for the term of your intended financing . “With some automakers, the advertised low rates may apply only to financing up to 48 or 60 months, which many consumers don't consider. The rate for the more common 72 or 84 months may be higher.” In also explains that some automakers might also advertise a low rate that does not apply to all models. For example, a vehicle may be advertised at $9,995 and carry a relatively high manufacturer interest rate of 6.34%. “However, if you read the fine print, the ad actually states that the low-interest rate is for the higher priced models. Dealers working with a consumer group (such as Car Help Canada or the APA) are required to provide this information, your level of assurance is higher,” explains Iny.
How do I get the best interest rates and discounts?
Some auto manufacturers provide subsidized (sub-vented) rates that a bank is unlikely to match. For a new vehicle, the subsidized price from the automaker is nearly always the best rate to start negotiating from. According to Iny, “you should inquire about additional interest rate discounts or rebates available.” For example, if you are a returning customer, you could qualify for a loyalty discount. If you are the owner of a competing brand, you might get a ‘conquest bonus,’ (although these types of bonuses are most frequently offered with pickups). Also, recent graduates, members of the Canadian military, participating employees or corporate affiliates (major bank, insurance company, major retailers, etc.) could all be eligible for a discount. Says Iny, “Not all salespeople will cover the bases on this—you need to ask.”
If you’re shopping for a used vehicle, consider a credit union. If you have equity in your home, you could also consider using a home equity line of credit. Dealers can often match these rates for good credit risks.
If I have bad credit, what kind of options do I have? What should I beware of?
According to Iny, a consumer with bruised credit should inquire about manufacturer financing. “Many automakers now offer an intermediate interest rate in the range of 6 - 12%. This range allows the dealer to provide a decent deal to a less creditworthy customer, which is much better than subprime rates usually offered on a used vehicle.”
If a consumer has bad credit and wants to put his or her finances in order, Iny says he or she may want to consider postponing a purchase of a vehicle. Alternatively, Iny suggests, “look for a reliable compact or intermediate sedan inspected by a trusted mechanic before the sale and then finance it for 36 months. A used vehicle like this can be purchased for $5,000-$8,000 and could offer you 5-7 years of good service. In the interim, you could get some help to put your credit back in order.”
“We're all human, and the auto purchase is driven partly by need coupled with a large dose of emotion,” acknowledges Iny. “People with impaired credit want to drive an SUV just like everyone else. If they try to do it on the cheap without the appropriate precautions, such as a Pre-Purchase Inspection and reliable warranty, they may end up paying too much for a vehicle with problems.”
What else should I consider when getting a car loan?
If the dealer is arranging financing, he/she may submit the consumer’s loan application to one or more financial institutions or lenders; therefore, a consumer could be approved by multiple lenders, potentially on different terms or at different interest rates.
Consumers should ensure they know who their application was submitted to. If the application was submitted to multiple lenders, consumers should inquire about each lender’s offered terms/rate. Important note: Multiple credit applications can negatively affect a borrower’s credit score.
Lenders sometimes pay dealers a fee--called a reserve--for arranging financing. Loans with higher interest rates often provide dealers with higher reserves. Therefore, consumers need to make sure they are getting the best financing rate and terms possible, not necessarily the rate/terms that provides the dealer with the most lucrative fee.
There have been instances of dealers (and/or consumers) inflating incomes or minimizing debts to ensure an application is approved. According to OMVIC, Ontario’s vehicle sales regulator, this misrepresentation is not only unethical; it is illegal. Consumers should always ask to carefully review the information on the application before allowing the dealer to submit it. OMVIC also recommends requesting a copy of the application.
Iny also points out that consumers should shop for a vehicle, not just a payment. “Many consumers focus solely on the monthly payment and not on the interest rate or term (length of the loan). With a new vehicle, look for the deal that offers the lowest overall outlay (rebate + financing at market rates, or market price + a low-interest rate). Dealers can perform the calculations to determine which is cheapest. Ask the retailer to calculate the overall obligation with taxes and stick to a monthly payment.”
What kind of buyer might a long-term loan (6-8 years) be okay for? Who should be cautious of a long-term loan?
A long-term loan may be a good option for consumers who keep vehicles for a long time and don’t put excessive mileage on their cars.
Iny advises, that in the absence of a substantial cash rebate, consumers consider the longest loan available at 0% and contribute the $50-$100 monthly savings to a Retirement Savings Plan or Tax-Free Savings Account, or pay off other debt if the consumer plans to keep the vehicle for the duration of the financing. “Few people are disciplined enough to contribute to savings and keep the car past the end of the financing term. Keeping your paid-up vehicle for a few years after the financing is over is the least expensive way to own a vehicle with a long-term loan.”
If you normally trade a vehicle in before it is paid off, an extended-term loan can lead to negative equity and snowballing debt. Learn more about negative equity here.
Iny also cautions buyers considering long-term loans for the purchase of a European or domestic luxury brand to “ bear in mind that these vehicles often cost more to service and repair after the warranty runs out. Purchase of a full-coverage extended warranty for two or three years after the original 4-6 -year warranty expires may give those consumers some peace of mind until the end of car payments.”
To learn more about the Automobile Protection Association, click here: Automobile Protection Association.
For more financial information and advice visit the Financial Consumer Agency of Canada.
Connect with OMVIC on social media!
Ontario Motor Vehicle Industry Council
Ontario Motor Vehicle Industry Council