According to Google, approximately one third of the Canadian population is thinking of buying a car, researching a car purchase or actively in the process of buying a car. The same study showed that Canadians spend a lot of time researching and thinking about buying a car before they actually go through with the purchase. Most Canadians finance their car purchase, as opposed to buying a car outright, meaning there is a definite need for research!

It appears that Canadians excel at making educated decisions when purchasing cars, but how exactly do they do that? If you’re new to the whole car buying process, you might be confused, overwhelmed and anxious about everything, as you should be! A vehicle is one of the largest items you will buy in your lifetime. Of course, you want to make educated financial decisions when purchasing a car but might not know how. If this is you, you’ve come to the right place! In this article, we will explore the steps you should take to find the best car loan for your needs.

Before diving in, there is one thing you should do: write down all of your car loan needs. After all, how exactly will you find a car loan for your needs if you don’t know what your needs are exactly? Start by asking yourself questions such as:

Whatever your needs are, add it to a list! When you’re shopping for a car loan, the path to the best option will be much smoother if you figure out exactly what you want beforehand.

Step 1: Gather information

The first step to finding the most ideal car loan for your needs is gathering information. This step will be the most time consuming out of all the others because you’re laying the foundation for your decision. Remember, without sufficient information, it’s impossible to make an educated decision! Below are several pointers to consider when collecting information about potential car loans.

Lenders

When it comes to a car loan, you have three main lender options:

All of these lenders have their own corresponding advantages and disadvantages. For example, traditional lenders tend to have long and time consuming approval processes when compared to alternative lenders. If you can, reach out to all three types of lenders to see what they offer you. The offer the lender gives will tell you a lot about how they operate and what the pros and cons will be when working with them.

The easiest offer to obtain is from an alternative, online lender because the application can be completed online and an offer will be produced quickly.

Interest rates

As you probably know, one of the biggest things to look out for is the interest rate. Interest is merely the cost you pay for borrowing money. Naturally, the lower your interest rate is, the better - everyone wants ‘cheap’ money! To get an idea of current car loan interest rate trends in Canada, check out these live auto loan rates.

Many car loan lenders are simply sales people selling money. Unfortunately, this means that their talk around interest rates and other costs can get quite slippery. Don’t be surprised if you can’t get an actual number out of them. Before signing anything, be sure to review the agreement in full and calculate what you’re going to be responsible for paying on your own. The last thing you want is an interest rate crisis on your hands. If you need help with the calculations, you can use Car Loans Canada’s calculator.

Repayment periods

When it comes to the length of the car loan, there is a clear trade off. The longer the loan term is, the lower your monthly payments will be. Sounds great, right? Not so fast, the longer your loan’s term is, the more interest you will pay overall. On the contrary, the shorter the loan term is, the larger your monthly payment will be, but you will pay less interest in the long run.

Another disadvantage of having a long repayment term is potential negative equity. Negative equity occurs when the owed loan amount is greater than the car’s value. This is problematic because if you want to get out of a car loan in the future, you wouldn’t be able to cover the owed loan amount by solely selling the car. Negative equity in cars is quite common because of how quickly the asset loses value.

Another thing to consider with repayment periods is open and closed loans. Open loans allow for irregular lump sum payments whereas closed loans do not. In other words, if you would like to make a $1,000 lump sum payment towards your car loan one day, you can do so with an open loan. Closed loans only allow the borrower to make the scheduled payments. If the borrower contributes more than the scheduled payment amount, there may be early payment penalties.

Credit score

Alas, the dreaded credit score! When you’re applying for a car loan, the lender will absolutely consider your credit score, there is usually no way around it. The good news is, there isn’t actually a minimum credit score requirement when it comes to car loans. That being said, if your credit isn’t the greatest, understand that you might not get the most lucrative car loan offers out there. It’s best to set your expectations realistically based on your credit score.

Good credit or bad credit, it’s ideal to know what your credit score is and what’s on your report before a lender looks at it. This way, you can be prepared for your meetings with lenders and questions they may have about your credit. When you check your credit report, it is also an excellent time to boost your credit before applying.

Other factors

When you’re out researching and shopping, below are other factors to consider and query.

You’ve gone out into the world and now know (basically) everything about car loans! The next step is to take the offers you’ve gathered from lenders and compare them. Perhaps one offer has the interest rate you want while another has the repayment terms you want. As much as we’d like to get everything we want right away, it usually doesn’t happen that way. Fortunately, you can negotiate with lenders to get closer to your goals.

Negotiating goes a lot smoother when you have something to offer in return for what you want. This could be a higher credit score, obtaining a cosigner or a larger down payment, to name a few. In addition, you could perform adequate research to support your negotiations and wants. For example, if you want to negotiate the interest rate, provide offers from other lenders that extended a lower interest rate. Keep in mind that lenders want your business, not for you to go to their competitor, even if they have to forgo something they want.

If you don’t get everything you want when shopping and negotiating, don’t fret! Maybe this was your first car loan and you weren’t eligible for everything you wanted. Or, perhaps your goals were too optimistic compared to what’s out there. Either way, learn from the experience. Personal finance knowledge isn’t gained overnight, sometimes mistakes happen which is a valuable lesson, even if you don’t see it that way in the moment! Regardless of why you weren’t able to get everything you wanted, you can always refinance your car loan in a couple of years to get more favourable terms and conditions.

Step 3: Select and drive off the lot!

The last step is to select a car loan based on your needs and drive the car off the lot. If you’re ever lost during the car loan selection process, refer back to your car loan needs as discussed at the beginning. Everyone’s financial position, needs and goals are different, it’s important not to lose sight of this when shopping for a car loan.

Last but not least, congratulations on your car purchase!