What to consider before applying for a car loan
Before you take the plunge and decide to apply for a car loan, there are a few factors that you must consider. We outline them below:
Speak with a broker to learn more about how car loans work
Before you sign a contract and commit to a considerable car loan, it’s important that you understand how car loans work, as well as how car leases work in Canada. You can contact BrokerLink and speak with an insurance broker about this very topic.
We can help explain how car loans work, the most common terms and conditions that come with loans, and what type of car insurance you will need when you lease or finance your car.
Please note that a BrokerLink insurance advisor can also help you transition from a leased car to an owned car by helping you cancel gap insurance from the dealership.
Check your credit score before applying
Your credit score is one factor that will determine how much your loan will cost. Similar to how mortgage rates are calculated in Canada, your credit score is a symbol of your financial responsibility, and thus it will be considered when a leasing company is calculating your loan amount and interest rate.
You can check your credit score for free in Canada. In fact, you can see your entire credit history for free. The better your credit score, the more advantageous your rates will be. If your credit score is low, you may wish to take steps to increase your score before applying for a loan.
Use an auto loan calculator to estimate your loan payments
Just like how you would want to know how much car insurance costs per month in Ontario, before you buy a car insurance policy, you will also want to know how much your auto loan will cost you on a monthly basis before committing to it. Thankfully, there are tons of free auto loan calculators on the internet that can help you determine what your auto loan payments will amount to.
These tools often have various filters, such as letting you calculate what your loan payments add up to on a monthly, bi-weekly, or weekly basis. All you have to do is plug in the total length of your loan and the amount of your loan. Generally speaking, the longer the loan, the higher the overall amount, but the lower the monthly payments.
Conversely, a shorter loan term usually equals more expensive monthly payments for a shorter period of time.
Think about what car you want to buy next
Whether you’re buying your first car or your tenth, it’s important to consider what car you want to drive next before you apply for a loan. As you know, cars vary in cost. Thus, if you’re after a more expensive car, you might be more likely to take out an auto loan. In contrast, if you want a budget-friendly vehicle, this might be easier to pay for out of pocket. If you decide to take out an auto loan either way, the amount of money you need through your loan will vary based on the value of the car.
Consider interest rates
Finally, before taking out an auto loan, be sure to consider interest rates. The interest rate is perhaps the most important number you need to look at when applying for a loan. What’s an interest rate? It’s the amount of money that it will cost you to borrow money from the bank.
In essence, the interest rate is the percentage of the vehicle purchase that will be added to the total cost of the vehicle during the duration of the loan term. Thus, the interest rate will play a role in determining the overall cost of the loan, as well as how much you must pay on a monthly basis.
Save up enough for a down payment
Although you might be able to get approved for a loan that covers the entire cost of the car, it’s generally not wise to do this. If you can, try and at least save up enough money to make a downpayment of 10% or 20%. For a new car, you ideally want to aim for a 20% down payment, but for a used car, you might be all right to make a down payment as low as 10% of the purchase price.
Get pre-approved for a car loan
Getting pre-approved for a loan is just as important as getting pre-approved for a mortgage. Although this isn’t a necessary step, the pre-approval process can provide a lot of insight into how much the loan will end up costing you.
However, before requesting a pre-approval from a lender, find out if the pre-approval process requires a hard credit check, as this could adversely affect your credit score.
Shop around for car loans
One last tip for getting a car loan is to shop around for one. Do not assume that the first lender you speak to is offering you the best deal or that all lenders offer the same interest rates. Lenders use their own unique formulas to assess risk and calculate rates. So before you sign a loan agreement, do your due diligence and shop around for loans at various providers.
You might even want to get pre-approved for an auto loan by multiple lenders, so long as you aren’t obligated to take out a loan from them later on. This way, you can compare your options and determine which one makes the most sense for your needs and budget.
Estimating your monthly car payments
Estimating your monthly car payments before agreeing to an auto loan is extremely important. The reality is that an auto loan might seem like a good idea upfront, but depending on the interest rate that you are eligible for, it might not end up being the most cost-effective option.
In order to make an informed decision about whether an auto loan is right for you, you will need to use an auto loan calculator, which can help you estimate your monthly car payments.
From there, you can determine whether an auto loan is within your budget. If it isn’t, you can also take steps to reduce your monthly loan payments or consider a cheaper car with a smaller loan.
An auto loan calculator is a useful tool during the car shopping phase. Why? It will instantly allow you to see whether or not a certain car is within your budget.
As you start shopping, plug in the relevant numbers to see if various potential purposes are financially possible for you. If they aren’t, you will learn this right away rather than after you’ve already bought the car or taken out a loan and it’s too late.
How do auto loan calculators work?
Most auto loan calculators require at least three pieces of information:
- The total loan amount
- The length of the loan term
- The annual percentage rate (APR)
The auto loan amount with the down payment accounted for
The loan amount will either be the total cost of the car if you need a loan of this size or the specific size of the loan you anticipate needing. For example, if you have enough saved to pay for half the car out of pocket, then your loan amount would be roughly half the value of the car you are interested in buying.
Similarly, if you intend to make a down payment or trade-in an old vehicle to lower the cost of the new car, then you should factor in these figures when calculating the total loan amount.
The length of the car loan term
The length of the car loan term is the second factor that you will need to know in order to use an auto loan calculator accurately. Why does the term length matter? The term length will determine your monthly payment. Loan terms usually range from 36 months to 72 months. While a shorter term length might sound more reasonable, you should remember that shorter terms usually come with higher monthly payments. That said, the interest rates might be lower.
On the flip side, longer-term lengths of 60 or 72 months will result in lower monthly payments, but they also usually have higher interest rates, which could mean more money in the long run.
To determine what your ideal car loan term is, you should speak with a financial professional who can help you calculate the maximum amount of money that you can afford to spend on your car loan monthly payment.
The annual percentage rate
The annual percentage rate is the third and final piece of information that you will need when using an auto loan calculator. Your leasing company will determine your annual percentage rate, and it will depend on factors like your credit score, national interest rates at the moment, and other industry or economic factors. When you get pre-qualified for an auto loan, you will receive an APR estimate, which you can then plug into an auto loan calculator and use to calculate your monthly payment.
The good news is that once you have the three pieces of information listed above, you can input them into an auto loan calculator and make calculations as many times as you wish. If you are choosing between ten different cars, you can plug in the figures for all ten cars to determine exactly how much your monthly auto loan payments would be.
This will allow you to make the most educated decision possible when it comes to what car to buy next and what auto loan to take out.
Auto loan interest explained
A key part of any auto loan is the interest rate. Therefore, understanding how auto loan interest works is of the utmost importance.
When you apply for an auto loan, whether you are applying for the official loan or getting pre-qualified for a loan, the lender will assign you an interest rate. This interest rate is an extra cost that you must pay on top of your loan principal.
Your loan principal is the loan amount that the lender approves you for. Auto loan interest is charged in exchange for the lender letting you borrow money from them.
Interest is calculated as a percentage, and this percentage will be added to your total loan amount. Therefore, each month, when you make an auto loan payment, a portion of this payment will go toward paying off the principal, and a portion of it will go toward paying off the interest that has accrued.
Since you know your interest rate upfront, you can easily determine what your total monthly payment will be, including both the principal amount and the interest rate.
How to get pre-approved for an auto loan
In order to get pre-approved or approved for an auto loan, you must be prepared to provide a few key pieces of information. Without the following information, no lender will approve you.
Your credit score
First, you will need to provide your credit score. All car lenders will require a copy of your credit score, as well as your credit history. A person’s credit score is a good indication of their financial responsibility, which a lender will want to see when they are considering you for a loan.
Aim to have as high a score as possible. Typically, borrowers will not be approved for a loan if they have a credit score under 630.
Your income
Your income is the next piece of information that a lender will require. There is usually an income requirement that must be met if you want to be approved for a car loan. This usually amounts to between $1,200 and 1,800 per month, though the minimum amount can vary depending on the car you are looking to take out a loan on.
To show proof of income, you should come prepared with a pay stub, letter of employment, or government notice of assessment. In lieu of this, you might also be able to show bank statements.
A copy of your driver’s licence
To be approved for a car loan, you must show that you are legally allowed to drive in your province, and you must provide a copy of your driver’s licence. Remember that your licence must be valid, so make sure that it hasn’t expired.
Your age
A lender will need to know how old you are when they are reviewing your loan application. This is due to the fact that most Canadian provinces have a minimum age that must be met for a loan to be taken out in your name. This age is 18 or 19 years old, depending on the province. If you are under the age threshold, you will not be able to obtain a car loan.
How to increase your odds of being approved for an auto loan
If you want to not only increase your odds of being approved for an auto loan but also increase your chances of being approved for a better interest rate, follow the tips below.
Raise your credit score as much as possible
Raising your credit score as much as possible is the first step you should take if you want to increase the likelihood that you will be approved for a loan. A few ways to do this include paying your bills on time, paying off your debt as quickly as possible, and keeping old lines of credit open that you no longer use.
It’s also best to avoid applying or opening multiple types of credit in a short time period, as this can lower your score and make you look riskier. The ideal credit score you should aim for is between 660 and 900.
Whatever you do, try to be above 630, as this is usually the lowest credit score that a person can have and still be approved for a car loan.
Ask someone to co-sign the loan with you
If you’re having trouble getting approved for a loan, consider asking someone to co-sign a loan with you. A co-signer who is in good financial standing can be a real asset and greatly increase your odds of being approved for a loan.
Just make sure that they understand the financial responsibility they will hold if they agree to co-sign for the loan. Namely, they will be on the hook for loan payments if you fail to make yours.
Shop for a less expensive car
If you can’t get the car loan you want, you may need to set your sights on a cheaper car. Part of the problem could be that the vehicle you want to take out a loan on is too expensive, which results in higher loan payments. To offset these costs and bring down your monthly loan payments, shop around for a cheaper car. Remember that the cheaper the car, the cheaper the loan payments are likely to be.
Get in touch with BrokerLink
If you want to find out more about how auto loan calculators work and how you can use them to calculate your monthly car loan payment, contact BrokerLink today.
We are not only auto insurance experts. We are general auto experts. This means that we can help you decide whether a car loan is right for you. We can also help you choose between buying and leasing a car, as well as explain other important concepts like the difference between title and registration.
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Auto Loan Pricing Calculator FAQs
Does financing a vehicle have an impact on my insurance rate?
Financing does not have an impact on your insurance rate. Insurance companies take other factors into consideration such as: the make and model of your vehicle, where you live and your driving experience.
Does the cost of a vehicle affect my insurance rate?
The cost alone of your vehicle doesn’t affect your vehicle in most cases. Insurance companies consider the type of vehicle, how safe it is, and how likely it is to be stolen. If you have an extremely expensive car that has a high likelihood of being stolen or has expensive parts, it’s possible this could affect your insurance rates.
Is a personal loan the same as a line of credit?
No, a personal loan is not the same as a line of credit. A personal loan is a fixed amount that is repaid over a fixed amount of time. With a line of credit, you can borrow up to a certain amount, repay the funds and borrow again as necessary.
If you have any questions, contact one of our local branches.
