Do you want to buy a new or used car? As interest rates hit highs not seen in over 20 years, here are some financing options and what you need to know about each one. Be careful, there are some to avoid if you can!
There are several solutions available to you to finance your vehicle purchase. Overview of their main characteristics.
Dealer financing
This type of financing is offered by most dealers. Currently, interest rates of 5 to 8% are not uncommon. It is possible to get a discount if you are already a customer of the merchant or depending on your credit rating.
Financing through a bank
The interest rates on a car loan provided by a financial institution are usually higher than those offered by dealerships. We find around 8% and more, depending in particular on the loan amount, the payback period and the loan file.
Sylvie De Bellefeuille, lawyer, budget and legal adviser at Option Consommateurs, recommends doing some research to make sure you find the best rate, but also to find out about the conditions. “If you want to resell the car before the end of the loan term, sometimes the lender’s approval is required. It’s better to check before signing,” she warns.
With a personal line of credit
This option is significantly more expensive as you have to reckon with an interest rate of at least 12% and more. This type of financing also requires good discipline on the part of the consumer. “Unlike a loan over a certain period of time, there is no fixed term. Beyond that, only interest payments accrue each month. Therefore, the reimbursement could take a long time,” mentions Sylvie de Bellefeuille.
With a home equity line of credit
Using your home equity loan to buy a car can be tempting as the interest rates are much lower than those on a personal loan (around 7-8% currently). However, Sylvie De Bellefeuille emphasizes that financing her vehicle with such a margin amounts to guaranteeing with her house a property that is rapidly depreciating. “We should save it for something more permanent, like renovating our property,” she says.
As with personal margin, salvation requires unwavering discipline.
Second or third chance credit
In this case, if you have a bad credit history and have been unable to obtain traditional financing, you may consider hiring lenders who offer second or even third chance loans.
Bear in mind that you will have to pay the price because the interest rates will then be very high. Expect almost 11% or more for a second chance and almost 15% or more for a third chance. Because the lender takes on more risk, they charge higher interest rates in return. This type of loan is more common for used vehicles than for new vehicles.
ADVICE:
- Sylvie De Bellefeuille points out that many consumers make the mistake of only considering the size of the monthly payments when calculating whether they can afford a vehicle, rather than considering the total price. They don’t estimate what their car will really cost them.
- Before you go to the retailer, create a budget to determine your financial flexibility and get a better idea of how much you can spend on this purchase. It will also help you resist merchant offers. “Don’t rely on the lender to figure out what your budget is, and remember that a car is an expense, not an investment,” she says.
- Beware of supplemental insurance and credit insurance, which are often expensive and offered by dealers. Note that you are not required to subscribe to it and you could probably find the same products for a lot cheaper elsewhere.
- Take the time to read the fine print in the contract to fully understand the financing terms. If you don’t feel well, don’t hesitate to let someone close to you accompany you.