Expert Advice on Vehicle Financing
Friday, November 20, 2020
As Financial Literacy Month wraps up, let’s look at one of the most important steps in buying a car: getting vehicle financing. You've identified the vehicle you want, you've asked all the right questions, you understand how to read a contract: now you need to figure out the best way to pay for your vehicle.
We contacted two experts on vehicle financing, George Iny and John Raymond from the Automobile Protection Agency (APA) to answer some common questions car buyers have.
Should I get financing from a bank or a dealership?
OMVIC: When you're shopping around for the best financing deal, one of the first decisions you'll make is whether to get financing from a dealership or a bank. How do you decide which one is best for you?
APA: Contact your financial institution to get a finance rate and proposed monthly payment and then compare that to what the dealership offers. Often dealerships can provide their customers special lower rates—called subvented rates, which tend to be lower than a bank rate.
Bank interest rates are much lower on a line of credit or home equity loan than they are for a conventional auto loan on a used vehicle. So, if you are prepared to use the equity in your home to guarantee a loan, interest rates are currently between 2.15 and 3%, compared to 5-6% for an auto loan.
The Bottom Line: Don't be afraid to compare rates to see where you can get the best terms. Auto loans from a bank come with a higher interest rate, so think about a line of credit or home equity loan instead.
What are my financing options if I have bad credit?
OMVIC: If you Google "bad credit auto financing," you see a lot of ads making promises like, "Bad credit? No problem!" You should be skeptical of any ad announcing there are no problems borrowing money with less than spectacular credit.
From the lender's perspective, taking on a consumer's bad credit is a risk, which means high-interest rates, but is there any way around it?
APA: If you have bad credit there are a couple of options. You can buy something less expensive that falls within your budget.
You could consider asking a co-signer to support your purchase. Before you do, make sure you are confident that you can afford the loan. A co-signer can help with financing but be aware that you could lose a friend or family harmony; both are more valuable than a car.
You can also avoid the purchase until your credit improves. If you recently checked your credit rating, try waiting six months after and pay your bills on time. With a little patience and discipline, you may be able to bring your credit score up 50 or 100 points, which could mean a better financing agreement with better rates for you.
The Bottom Line:There are options if you have bad credit; but beware of supposed too good to be true promises. Choose to either buy within your budget or work on repairing your credit before you start shopping around for financing.
If I lose my job, can I renegotiate my financing?
OMVIC: We live in uncertain times when, unfortunately, some of us have to worry about job loss. What happens if you were working when you got your car loan but then lost your job. Can you renegotiate the terms of your car loan?
APA: You cannot renegotiate a traditional auto loan. If your loan is through your bank, you may be able to get your loan consolidated or negotiate a temporary suspension of payments. The best thing to do is inform the lender right away and try to find a solution.
The Bottom Line:Communicate with the lender as soon as you can. Many people have been struggling with money and unemployment during the pandemic. If you have a loan through your bank, you may be able to arrange for payment deferral or loan consolidation.
As the regulator of motor vehicle sales in Ontario, OMVIC’s mandate is to maintain a fair and informed marketplace by protecting the rights of consumers, enhancing industry professionalism and ensuring fair, honest and open competition for registered motor vehicle dealers. Visit omvic.ca to learn more about your car-buying rights as well as additional tips for buying a car in Ontario.
For car buying tips, check out the OMVIC Academy. You can view other resources such as multilingual videos and download the OMVIC Car-buying Guide
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Ontario Motor Vehicle Industry Council
Ontario Motor Vehicle Industry Council
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