If you’re in the market for a new car, one of the first things you’ll need to do is find the right loan to finance your purchase. But with so many options out there, how do you know which one is right for you?
This article will explain what car loans are and how they work, who offers them, and what you should consider before signing up for vehicle financing.
Let’s get started.
What is a car loan?
A car loan is a type of personal loan that you can use to finance the purchase of a vehicle. When you take out a car loan, you’ll agree to repay the lender, with interest, over a set period.
An auto loan is one of the most common financing options that people take on. It’s also the second largest secured loan that most people take out in their lives, behind the mortgage on their house or condo.
Do you need a car loan to buy a car?
If you’re looking to buy a new or used car, the chances are good that you’ll need to finance at least part of the purchase with a loan.
The only exception would be if you had enough cash saved up to pay for the entire purchase outright. But for most people, that’s not realistic.
And since car loans are so common, nearly everyone has one at some point in their life.
How do car loans work?
Car loans work by allowing you to spread out the cost of your vehicle purchase over time. You’ll make monthly payments to your lender until the loan is paid off and you will own the car outright at the end of your loan term.
This is one of the big advantages of getting a car loan. It makes it easy for you to get the car you need today without waiting months or years to save for the purchase price.
What’s the difference between a car loan and an auto lease?
It’s important to understand the difference between an auto loan and an auto lease.
Car Loans
An auto loan is a financing option that allows you to finance the purchase of a vehicle. You will make monthly payments to your lender until the loan is paid off, at which point you will own the car outright.
Auto Leases
An auto lease is a type of rental agreement where you agree to pay for the use of a vehicle for a set period, typically 2-4 years. You will either need to return the vehicle or buy it outright at the end of your lease term.
What are the benefits of taking out a car loan?
There are several benefits to taking out a car loan:
You can buy the car you want today
With a car loan, you can finance the purchase of your vehicle and take it home immediately. This is especially helpful if you need a car for work or don’t have the time to save up for a purchase.
You may get a lower interest rate
Dealerships and car manufacturers are incented to get you to purchase their vehicles. They often have special promotions that offer lower rates than you might otherwise get at a bank.
You can build your credit
Making timely payments on your car loan can help improve your credit score. This can give you access to better rates in the future and help you qualify for other types of loans, like a mortgage.
What are the drawbacks of taking out a car loan?
There are some potential drawbacks to taking out a car loan that you should be aware of:
You’ll have a monthly payment
One of the most significant disadvantages of a car loan is having a monthly payment that is locked in. This can make it difficult to afford things like a mortgage or rent if you haven’t budgeted correctly before taking out the loan.
You may end up paying more than the car is worth
If you’re not careful, you may owe more on your loan than the car is actually worth. This is especially true if you have an extended loan term or your vehicle depreciates quickly.
You could lose your car if you can’t make the payments
If you can’t make your loan payments, you could lose your car to repossession. This is a serious risk that you should know before taking out a loan.
Who offers car loans?
Car loans are offered by various lenders, each with their own set of advantages. Here’s a look at the most common options.
Banks
Banks are a popular choice for car loans because they often have low-interest rates. However, you may need to have good credit to qualify. If you have an existing relationship with a bank or credit union, you may be able to get a better deal on a car loan than you would from another lender.
Credit Unions
Credit unions are another popular financing option because they offer lower rates than banks. However, you may need to be a member of the credit union to qualify.
Dealerships
Your local dealership will often offer financing through their own lender or a third-party lender. A dealer can be a convenient option, but you may pay a higher rate than you would with another lender.
Online Lenders
Several online lenders offer car loans to Canadians. At SkyCap, we provide personal loans that you can use to buy a car. Check out our Car Loans page for more details on how to apply.
What are the major variables in a car loan?
When comparing car loans, it’s essential to look at more than just the interest rate. Here are some other things you should consider:
Loan term
The loan term is the time you have to repay your loan. Loan terms typically range from 36 to 84 months and have a consistent monthly payment date.
Interest rate
The interest rate is the cost of borrowing money, and it’s expressed as a percentage of the loan amount. Actual interest rates vary from month to month, so it’s important to grab low rates as they are available.
Payment frequency
This refers to how often you need to make payments. If you are paid monthly, and your car payments are weekly, you may want to consider alternate options for your loan. Car loans range from those paid weekly to bi-weekly to monthly.
Fees
Some lenders charge an origination fee to cover the cost of processing your application. Other fees like administration fees can add to the total cost of your vehicle over time.
What is the process for getting a car loan?
The process for getting approved for a car loan varies by lender, but there are some common steps that you can expect.
Check your credit report
The first step is to check your credit score. This will give you an idea of what rates someone with your credit history may qualify for. Your credit rating is important when you need to get pre-approved for a loan, as lenders use various credit tools to evaluate anyone looking for a loan.
Shop around for rates
Once you know your credit score, you can start shopping around for car loans. Be sure to compare the rate, loan term, and any fees that may be charged.
Apply for a loan
Once you’ve found a loan you’re interested in, you can apply for it online or in person. You’ll typically need to provide some information about yourself and your finances.
Get approved and sign the paperwork
If you’re approved for the loan, you’ll need to sign the paperwork and agree to the terms and conditions. Once that’s done, you’ll have the money you need to buy a car.
10 things to consider when looking for a car loan
There are a few things you’ll need to consider when shopping for a car loan, including:
How much money do you need to borrow?
The first thing you’ll need to consider is how much money you need to borrow. This will help you determine what kind of loan you should get. If you only need to borrow a small amount of money, you may be able to get by with a personal loan. However, if you need to finance a more significant purchase, like a vehicle, you may need to apply for an auto loan.
The size of your down payment
The size of your down payment will also affect the terms of your loan. If you can put down a larger amount, you may get a lower rate, more favorable terms, and a better loan payment schedule.
How much can you afford to pay each month?
Another important factor to consider is how much you can afford each month. This will help you determine the loan term and the size of your monthly payments. It’s important to make sure that your monthly payments are affordable so that you don’t default. These payments remain constant throughout the loan, so understanding what you are getting into is critical.
The length of the loan
The loan length will affect both your monthly payments and the total amount of interest you’ll pay over the life of the loan. A shorter loan will have higher monthly payments, but you’ll pay less in interest. A longer loan will have lower monthly payments, but you’ll pay more in interest over time.
The interest rate
The interest rate is the cost of borrowing money, and it’s expressed as a percentage of the loan amount. When you’re shopping for a car loan, it’s important to compare rates to get the best deal possible. Lower interest rates are always better in the long run.
The loan terms
The loan terms are the time you have to repay your loan. Common terms typically vary, with various lenders offering more or less flexible terms depending on whether customers have a solid past credit rating. In terms of length, the shorter the loan term, the higher your monthly payments will be. However, you’ll save money on interest over the life of the loan.
Is there a prepayment penalty?
Some lenders charge a prepayment penalty if you pay off your loan early. You’ll want to avoid this, so be sure to read the fine print before signing any paperwork.
Your credit score
Your credit score will play a significant factor in determining what kind of loan terms you qualify for. If you have good or excellent credit, you’ll likely be able to get a lower interest rate and more favorable terms with your credit approval. However, if your credit isn’t as strong, you may have to pay a higher rate or a larger down payment.
The type of vehicle you’re buying
The type of vehicle you’re buying can also affect the terms of your loan. Some lenders may offer special financing deals for certain cars, such as a new vehicle or off-brand model.
Do you have a vehicle to trade in?
If you have a vehicle to trade in, you may be able to put the value of that car or truck towards purchasing your next vehicle. This will help your bank accounts by reducing the total amount of your loan.
Can I get a car loan with bad credit?
If you have bad credit, you may still be able to get a car loan. However, you may have to pay a higher interest rate or a larger down payment.
At SkyCap we specialize in personal loans that can be used to purchase a vehicle. If you need a vehicle and want a reasonable loan payment, fill out this application form for a quick approval.
Final thoughts
When it comes to getting a car loan, it’s important to find the right lender for your financial situation. By doing your research and comparing interest rates, you can get the best deal on a car loan that fits your needs. Remember to stay within your budget and make payments on time so you can enjoy driving your new car!
Need a quick loan for a car or something else? SkyCap is a lender based in Canada and exclusively lends to Canadians. Check out our various loan products on our services page.
