Did you know that recent reports note that car loan payments, insurance, fuel, and maintenance costs amounted to almost $450 monthly for Canadians? This makes auto financing the third-largest expense for most around the country.
This makes it super important to understand what you’re getting yourself into before looking for a loan on Canada Drives or Fairstone.
However, we understand that auto financing is a big topic, and there’s a lot of information out there on the best way to go about getting a car loan in Canada.
That’s why we’ve created this complete guide for you. Follow along and we’ll break down all the different factors involved in auto financing to help you understand exactly what goes into getting a car loan and how you can improve your finances to get the best rate.
What’s a Credit Score?
First thing first, we’ve gotta talk about credit scores! If you’re not sure why they’re relevant to auto financing then we’ll get to that in a bit. But first, what is a credit score?
A credit score is a numerical representation of your creditworthiness. In other words, it’s a number that lenders use to determine how likely you are to repay a loan. The higher your credit score, the more likely you are to be approved for a loan with favorable terms.
Credit scores typically range from 300 to 850, and the average credit score in Canada is about 650. If you’re in the market for a car loan, it’s important to understand how your credit score will impact your loan. Let’s talk about that…
Auto Financing: Why Your Credit Score Is So Important
Auto financing is something that a lot of people don’t think about until they need it. Then, they realize how important their credit score is. Your credit score is one of the most important factors in getting approved for a loan and getting a good interest rate.
Auto financing companies use your credit score to determine how likely you are to default on your loan. The higher your credit score, the lower the risk you pose to the lender and the more likely you are to be approved for a loan with a lower interest rate.
All in all, having a good credit score can save you thousands of dollars over the life of your loan.
So if you’re thinking about buying a new car, make sure you’re prepared by checking your credit score and improving it if necessary. Don’t worry, though, we’ll get into some credit tips below. For now, let’s clarify one thing first.
How Does Credit Work in Canada vs. the USA?
When it comes to auto financing, there are some key differences between credit in Canada and the United States. This is important to note as most online articles you’ll read pertain to Americans. However, it’s mostly the same.
First, if you’re looking to finance a car in Canada, you’ll need to understand how car credit works in Canada.
In general, to finance a car you need to take out a loan to cover the cost of the vehicle. The loan is typically repaid over a period of time, and the interest rate will vary depending on the lender.
In order to qualify for car credit, you’ll need to have a good credit score (as mentioned above). This is because the lender will use your credit score to determine whether or not you’re a high-risk borrower. If you have a good credit score, you’ll likely be offered a lower interest rate.
However, if your credit score is poor, you may be required to pay a higher interest rate. When repaid responsibly, the good news is that an auto loan can help you increase your credit score.
It’s important to remember, however, that if you default on your loan, it could have a negative impact on your credit score.
In the United States, you can get a car loan from a bank, credit union, or other financial institution. The interest rate on your loan will depend on your credit score, the type of vehicle you’re buying, and the length of the loan.
This is similar in Canada, but the credit modeling works slightly differently and the lenders available to you are different as well. Let’s explore the two main credit bureaus in Canada.
Equifax Canada is one of the leading credit reporting agencies in the country. They provide information to help Canadians make informed decisions about their credit and personal financial affairs.
They also offer a variety of products and services to help you understand your credit report, protect your identity, and improve your financial health.
TransUnion is another credit reporting agency that provides credit reports, credit scores, and other related services to consumers and businesses. TransUnion Canada is the Canadian division of TransUnion and is headquartered in Toronto, Ontario.
As a credit reporting agency, TransUnion collects and maintains information about consumers’ credit history from a variety of sources.
This information is then used to create credit reports, which are accessed by lenders when considering applications for credit products such as loans, mortgages, and credit cards.
What Credit Score Do You Need to Finance a Car in Canada?
Is 850 a great credit score in Canada? Yep! But is it what you need to get an auto loan? It doesn’t necessarily have to be that high.
In Canada, the minimum credit score required for a car loan is 600. However, this doesn’t mean that you’ll automatically be approved for a loan if your score is 600. Every lender has different standards, and they will all look at your credit history and financial situation as a whole to make a decision.
If you have a high credit score, you’re more likely to be approved for a loan with a low interest rate. And that’s really what matters (and what this is all about). A lower interest rate can save you thousands of dollars over the life of the loan.
So, if you’re thinking about financing a car, make sure you check your credit score and try to improve it if necessary. The higher your score, the better your chances of getting approved for a loan with favorable terms.
Different Types of Car Loans Available in Canada
Cars are a big purchase, and most people can’t afford to pay for one outright. That’s where car loans come in. We’ve (hopefully) established that by now, along with the fact that your credit score will impact the rates you get.
But what are the different types of car loans available in Canada? Here are three of the most common.
Traditional Bank Lending
Traditional bank lending is the most common type of car loan available in Canada. This type of loan is typically available through major banks and financial institutions. Traditional bank loans tend to have low interest rates and flexible repayment terms.
However, borrowers may need to have a good to great credit history in order to qualify for this type of loan.
Alternative lenders are a type of financial institution that offers car loans to borrowers with bad credit. Alternative lenders typically have higher interest rates than banks or credit unions, but they may be willing to work with borrowers who have a low credit score.
There are a number of different alternative lenders in Canada, and each has its own eligibility requirements and terms. As such, it’s important to compare different lenders before applying for a loan, including Fairstone, Canada Drives, and more.
All in all, though, alternative lenders may be able to help you get the financing you need to purchase a car. However, it’s important to shop around and compare rates before signing on the dotted line.
If you’re looking to finance a new or used car, one of the options available to you is dealership financing. Dealership financing is when the car dealer provides the loan for the vehicle purchase.
One of the benefits of dealership financing is that it can be easier to get approved for a loan since the dealer may have relationships with multiple lenders. Another benefit is that you may be able to get a lower interest rate since the dealer may be able to negotiate on your behalf.
However, one of the drawbacks of dealership financing is that you may end up paying more in interest over the life of the loan. Additionally, some dealerships may require a large down payment or extend the term of the loan in order to increase their profits. As such, it’s important to do your research and compare offers before choosing dealership financing.
Interest Rates Canada: How to Get the Best Rate
Really, the way to ensure you get the best interest rate on your auto loan is to ensure you have a good credit score and manage your debt wisely. Here are a few tips that can help you accomplish just that.
Make Payments on Time
One of the most important things to do in order to improve or keep your credit score up is to make all of your payments on time. This shows lenders that you’re responsible with your money, and they’ll be more likely to give you a better interest rate as a result.
Don’t think it matters that much? It’s actually one of the top things credit bureaus look at when calculating your score! So, yeah, it’s important. Miss more than one payment and you risk having your credit score drop.
Use Credit Wisely
What does “using credit wisely” even ben? For us, it means paying your bills on time and keeping your balances low. In short, try to spend responsibly.
This includes not overcharging your credit cards, paying your bills on time, and aiming for a great credit mix when you can.
Limit Your Credit Checks
If you’re looking to get the best rate possible, it’s important to limit the number of credit checks you have. Every time you apply for a new credit card or loan, your score will take a hit. And, if you have a lot of applications in a short period of time, it will look like you’re desperate for credit, which can lead to even higher interest rates.
There’s no point in hurting your score by applying for multiple products that you’re not qualified for. By following these simple tips, you can make sure you get the best interest rate possible.
Sign Up for Autopay
Interest rates in Canada have been on the rise recently, but there are still ways to get a good rate on your loan. One way to do this is to sign up for autopay. When you set up autopay, your lender will automatically deduct your payment from your account each month.
This can help to reduce your interest rate, as well as the amount of time it takes to pay off your loan. In addition, autopay can also help you to stay on top of your payments and avoid late fees. To find out if autopay is an option for you, contact your lender or your bank or credit card provider today.
Increase the Length of Your Credit History
One of the most important factors that lenders look at when determining interest rates is your credit history.
The longer your credit history is, the more likely you are to get a better rate. So, if you have a short credit history, one of the best things you can do is simply wait.
Over time, as your history grows, you’ll become more attractive to lenders and be able to get a better rate.
Regularly Check Your Credit Score
By law, you are entitled to one free credit report per year from each of the major credit reporting agencies. This report will show you your current credit score as well as any negative marks that may be holding it down.
If you see any errors, you can dispute them with the credit bureau and have them removed. Also, be sure to keep your credit card balances low and make all of your payments on time.
Revitalize Your Finances With Marble
When it comes to auto financing in Canada, there’s a lot to know. From car loans and credit scores to understanding whether or not to get a loan from Canada Drives or Fairstone, it can get quite confusing. However, we’re here for you./
MyMarble is the best way to reach your financial goals, including improving your credit score so you can snag that great auto loan at rates you deserve. Sign up for your free and personalized financial wellness dashboard to get started today.