From the make and model of the car to the interest rate and length of a car loan, there’s a seemingly endless amount of decision-making that goes into buying a car. Reader, Camilla, is in the throes of this whole process and reached out for some guidance. Financial expert Jessica shares insights with her and the rest of us on all the things to consider.
The question
I found the car I want. I was ready to buy, but there was a catch. The salesman said they don’t work with outside lenders because their prices are already really low. Is that normal? Doesn’t seem right to force someone into a rate that’s more than what they could qualify for.
Thanks, Camilla, Y.
Would it be wrong of me to get the financing and then refinance through my bank at a much better rate?
The answer
Dear Camilla, while it’s not illegal for a car dealership to refuse outside financing, it does raise some red flags. If you decide you absolutely cannot live without that particular vehicle, the good news is you do have options. Let’s walk through some key details to know before buying a car.
Different ways you can buy a car
When weighing your options for buying a car, there are a few choices to consider. You could buy a car in cash or choose financing if you want to own it outright. In addition, you can consider leasing rather than purchasing outright if that better fits your needs.
Buy a car outright in cash
Pros
- No need to take out a loan and go into debt
- No monthly payment required
- You own the vehicle outright
Cons
- It takes time to save up a sufficient amount of money
- Higher requirements for cash upfront, rather than monthly payments that fit your budget
Purchase a car with financing
Financing a car means taking out a car loan for the cost of the vehicle. Your monthly car payments go to the bank, credit union, or financial institution. You will also be paying more than just the cost of the car; you are adding the cost of borrowing to the total price. Interest rates may be fixed or variable, which can impact your total loan cost.
Pros
- You can get a vehicle sooner than waiting until you can save the total purchase price.
- Financing spreads out the cost of vehicle ownership over a longer period.
Cons
- Interest is charged over the life of the loan, making the total cost significantly more than the purchase price.
- Monthly loan payments are required.
- You could be in a negative equity position for a while, making it difficult to sell your car if needed.
Leasing
Leasing a car is like renting it with the option to buy at the end of the lease.
Pros
- Lease payments are usually lower than a car loan payment
- You can trade in the vehicle for another at the end of the lease
- Some leases offer a purchase option at the end of the term
Cons
- May come with additional upfront costs
- You must return the vehicle at the lease end unless you decide to buy it
- Mileage limits apply
- Early termination fees may apply
Understanding the total costs of purchasing a car
It’s important to consider more than just the purchase price or monthly payment. Include financing fees, interest rate, insurance, maintenance, and fuel in your calculations. An online auto loan calculator can help you estimate the full cost of an auto loan or lease, including the annual percentage rate (APR). Just because the monthly loan payment fits your budget doesn’t mean it’s a sound financial decision; consider the total costs carefully.
If you are buying a new car, remember that the sticker price is not the same price you could potentially resell the car for in the future. A new vehicle depreciates the moment you drive it off the lot. That means it loses a large amount of value immediately.
The interest rate you can receive for your loan depends on several factors. Interest rates are generally set based on the Bank of Canada’s rates, with a premium added. Your credit score is not only crucial for credit cards, but it will also influence the loan interest rate you qualify for. Having good credit means lower interest rates, while individuals with bad credit may face higher rates or need to obtain direct lending from a financial company. Your credit score can also impact insurance costs. Don’t forget to consider the various ways you could cut your car costs to save overall.
Depreciation and negative equity
Depreciation is the loss of a vehicle’s value over time. New cars depreciate quickly, which can affect your trade-in value if you plan to sell or buy a used car later. The older a vehicle gets, the less it’s worth and the less you can sell it for. Other factors that can affect depreciation include mileage, general wear and tear, failure to maintain your vehicle, and the fact that certain brands tend to hold their value better over time.
Negative equity happens when the amount owed on your car loan exceeds the trade value. If your loan is long-term or the interest is high, this is more likely to occur. The car depreciates as you use it, but the loan amount takes longer to be paid off, and the two rates are not in sync.
Preparing for car shopping
It is essential to be prepared when negotiating with a car dealership. There are a few things you can do to make sure you have the necessary knowledge and information to support your purchase:
- Know your full purchase price and financing options
- Get pre-approved for a car loan at a bank, credit union, or through personal banking
- Gather multiple loan quotes to compare interest rates
- Check used car and new car sales for comparable vehicle pricing
- Understand your line of credit if using one for the down payment
- Complete a sample budget factoring in all your new expenses and ensure you know the maximum payment you can afford, so you understand the impact on your bank account.
Where to get auto financing
You can secure a car loan from a bank, credit union, or financial institution. If you have had a bankruptcy or bad credit, alternative lenders or car dealers may offer financing. Direct lending or financial companies specializing in car financing may also offer flexible financing options. Understanding Credit and how it impacts you can be beneficial before you go into financing discussions.
Negotiation tips
Your greatest tool in negotiation is the ability to walk away. Try not to get emotionally attached to the perfect car. Compare car sales at multiple car dealerships, use your pre-approved loan application, and show the rates you qualify for elsewhere. This helps avoid being pressured into a high-interest rate or unfair loan terms.
Dealer financing restrictions
Dealers may refuse outside financing to protect incentives or commissions. It is not illegal for a dealer to refuse outside financing. The dealer receives incentives or commissions for bringing clients to the financing companies. What they are doing is not discriminatory, and there is no law against it. Just like some stores or restaurants only accept cash or debit, or don’t take certain credit cards. They can determine which payment methods they will accept as part of their business practices. Regardless of the restriction, if you decide to take their financing, always confirm the loan details and interest rate.
Refinancing your car loan
Yes, you can refinance a car loan. Refinancing means you are applying for another loan. Lenders will run a hard credit check, which can temporarily affect your credit score. Lenders will want to see the existing loan and a history of on-time payments. Wait 30–90 days after purchasing your vehicle before you apply to refinance. Best practice is to ensure these steps are complete before you apply to refinance your loan:
- Ensure the vehicle title is transferred
- Make at least one on-time payment
- Confirm the loan appears on your credit report
- When refinancing, a hard check will impact your credit score, so plan accordingly. Using direct lending or bank auto loans with lower rates can reduce total interest charges and shorten the loan term.
Understanding your options
When making a significant financial decision, like buying a car, using a line of credit, or taking a fixed-rate or variable-rate car loan, the most important thing is to make an informed decision. You can use a calculator to estimate your total loan cost, including annual percentage rate, but don’t forget the other costs of car ownership and factor them into your budget. Consider all financing options from banks, credit unions, and financial companies. Be ready to walk away if the terms don’t fit your needs. Remember, there are tons of dealerships and cars out there to choose from. If it comes to it, you can always refinance later. Knowing your trade value, personal banking tools, and credit score can also save money and stress.
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