A car is an expensive purchase that not everyone can make with cash. In the absence of the necessary amount of money, some people decide to take out a car loan. This article describes in detail the conditions and features of car loans in Canada.
Car loan: concept, features
A car loan is a special-purpose loan given to the applicant for the purchase of a vehicle. This type of credit is characterized by the following features:
- Targeted nature - the money allocated by the bank can only be spent on the purchase of a car.
- The purchased vehicle remains in pledge with the lender.
- Car loans can be issued with or without a down payment.
- The borrower has no right to dispose of the car (without the lender's consent) until the debt has been fully repaid.
- Car loans are of two types: standard (lending to individuals) and commercial (buying on credit special equipment, trucks and other vehicles for business activities).
Principles of planning to buy a car on credit
Before you send an application for an auto loan, you should soberly assess your financial capabilities. This type of loan is not limited to a single monthly payment. There are other cost items that arise here:
- regular fuel costs for the car;
- payment of insurance (in many banks in Canada this is a prerequisite);
- vehicle maintenance and repair (if necessary);
- payment of taxes to the national budget;
- parking fee.
Thus, before taking a car loan, you should summarize all the possible costs and analyze whether in the future it will be financially possible to cover them.
The procedure for obtaining a car loan in Canada
The process of issuing a car loan in Canada includes the following main stages:
- Selection of brand, model, as well as other characteristics of the vehicle, which is planned to be purchased with borrowed money.
- Search for a lender - you need to analyze as many offers as possible to choose the best among them.
- Filling in and sending a preliminary application for an auto loan.
- Collecting and presenting documents to the lender (this can be income confirmation documents, car evaluation, etc.).
- Waiting for a decision of the lender.
How to choose a lender?
One of the mandatory stages of registration of a car loan is the choice of a suitable lender. In Canada, there are two options for a potential borrower:
- Applying to the bank is a classic way of issuing a car loan. There are many banks in Canada that offer different programs to buy a car with a loan. This option is suitable if the borrower has a good credit record. The disadvantages include: the collection of a large number of documents, the need for a high credit rating.
- Getting a car loan at the dealer centre - in addition to the sale of vehicles there is also the possibility of registration of the car wit a loan. Features of this option: the choice of banks offered by the car dealer centre, the opportunity to buy a car on more beneficial terms.
Requirements for a borrower and a vehicle
To obtain approval of an application for a car loan, a prospective borrower must meet a number of requirements, notably:
- legal age;
- solvency;
- positive credit record;
- the existence of the minimum allowable work experience;
- official job.
Moreover, certain requirements are also imposed on the object of pledge, i.e., the vehicle. The following items can be included here:
- compulsory car insurance;
- it can be a used or a new car no older than the age specified by the particular lender;
- legal “cleanliness” of a used vehicle purchased with a loan (absence in the base of stolen cars, objects that were seized and etc.);
- requirements concerning the number of persons who owned a car (such a requirement is valid in some banks).
Which documents would be required?
The list of documents that will need to be collected when applying for a car loan in Canada:
- applicant's passport or other document confirming his or her identity;
- documentary confirmation of the place of residence;
- certificate of the borrower's income;
- vehicle insurance;
- consent to the request for credit rating information.
The list presented above is not exhaustive. Depending on the selected bank, other documents may be requested.
Can I get a car loan with a spoiled or zero credit record?
One of the key indicators taken into consideration by the bank when making a decision to issue a car loan is the credit record of the borrower.
The absence of a credit record or its improper condition is not yet grounds for abandoning the idea of buying a car with a loan. In such a situation, the following steps can be taken to increase the chances of obtaining borrowed funds:
- find a reliable guarantor (it's important that he or she has a high income, good credit record, and etc.);
- before applying, you can try to raise your credit rating due to the timely return of small bank loans;
- you can make a large down payment (30-50% of the value of the car).
Conditions for issuing a car loan
Regardless of the chosen bank, a single set of conditions applies for each car loan. They are expressed in the following parameters: interest rate, down payment, loan term and repayment procedure.
Each lender gives a car loan on his or her own terms, so different banks may have different interest rates, terms of repayment, and etc.
Interest rate
One of the key conditions of the car loan is the interest rate. It represents a fee for the usage of borrowed money. It is expressed as a percentage of the total loan amount.
The value of this indicator is influenced by such factors as:
- credit rating of the borrower;
- availability/absence of a permanent client status in a particular bank;
- selected loan program;
- strategy adopted in the bank;
- the amount and return terms of the car loan.
Initial payment
Some banks have car loan programs that require the borrower to pay a down payment. This is a certain percentage of the cost of the vehicle, which is paid immediately. In this case, the loan is issued for the remainder of the value of the car.
The higher the down payment is, the greater the borrower's chances of being approved are, as well as the lower the total overpayment of the loan. Also, this loan option provides a reduced interest rate.
Making a down payment is an optional condition for obtaining a car loan. There are banks that are willing to give money without that payment.
Lending period
The loan period refers to the period of time during which the borrower must repay the car loan to the bank.
The bank individually establishes the term of the loan for customers. If necessary, the borrower can extend it (for example, in case of lack of financial ability to pay the monthly payment).
Car loan repayment rules
In the majority of cases, the car loan is repaid by paying a monthly payment set by the bank. It consists of two parts:
- accumulated interest;
- “body” of credit.
The borrower must make monthly payments on the car loan according to a schedule approved by the lender. This should continue until the loan is fully repaid.
How to preliminary calculate the size of payments on an auto loan?
For customers who want to get a car loan, there is an opportunity to find out in advance the total amount of the loan, which they can calculate, the monthly payment and the amount of overpayment for the entire period. Many banks have online calculators for this purpose on their websites. They are very easy to use and involve only two steps:
- input loan parameters in empty fields (desired size of car loan, cost of car, and etc.);
- start calculation.
The system will give you the actual car loan amounts within seconds.
Impact of car loan on borrower's credit rating
A car loan has a direct impact on the borrower's credit rating. Depending on the peculiarities of debts repayment to the bank, the client's credit record may ruin or, vice versa, improve.
The impact of a car loan on a borrower's credit rating reflects on the following two situations:
- Monthly payments are regularly missed, the client does not want to contact the bank, the client pays only a part of the established amount - all these circumstances are reflected in the credit record of the borrower, which will negative effect on his or her overall rating. Possible consequences: difficulties in applying for a loan in the future, a very high probability of rejection of the loan.
- The borrower repays his debt to the bank faithfully, without missing deadlines - in this case a positive impact on the credit rating of the client is made.
The credit record also collects the number of applications submitted by the borrower. However, there is an important nuance here - the credit bureau provides a grace period (30 days), during which the person whi intends to buy a car can apply to different banks and choose the best option. In this case, only the application for which the car loan is issued will be recorded in the credit record.
Will a car loan be approved after bankruptcy or with a consumer loan?
Obtaining approval for an auto loan after bankruptcy is not easy, but it is real. The main thing is to know how to act correctly in such a situation. In order to increase your chances, you can take such measures as:
- choose a car which corresponds to the real financial capabilities of the borrower;
- enlist the support of a mediator, who will tell you how to approach the bank and what to focus on;
- attract a reliable solvent guarantor;
- make an increased down payment.
The situation is completely different if the borrower already has one unpaid loan. When applying for a second loan (in this case a car loan), the bank will analyze the debt load indicator (DLI). It represents the ratio of the borrower's entire liabilities to his monthly income. With an increased value of such an indicator, there is a possibility of getting a refusal in auto lending.
Ways to repay debt
There are several ways to repay your car loan debt ahead of schedule:
- Return the full amount to the bank in cash - if financially possible, the borrower can set aside money at the same time as paying the monthly payment to close the debt ahead of time. Once the necessary amount is collected, you can go to the bank and make the final payment corresponding to the remained amount of the loan.
- Car sale - this option is allowed only with the lender's consent. In this case, the borrower sells the vehicle and uses the raised money to repay the loan. Usually this method is used when there is no longer an opportunity to pay the car loan.
- To return money to the bank from the amount borrowed from relatives or acquaintances. The advantage of this option is that there is no need to pay further interest.
Early repayment of a car loan
Borrowers have the right to repay the auto loan before the deadline. In this case, it will be about early repayment of the debt to the bank.
Penalties for early repayment of a car loan
Some banks have a system of fines for early repayment of debt for a car loan. The main reason for such sanctions is the lender's desire to get back some of the interest it loses because the debt is closed before the deadline set in the contract.
To avoid such a situation, at the stage of negotiations you should find out whether a particular lender charges a penalty for early repayment of the loan.
Impact of early debt closing on the borrower's credit rating
A car loan repaid early has a negative impact on the borrower's credit rating. The fact is that the lender loses part of the income (in the form of interest) that he would have received if the borrower had returned the loan according to the established schedule.
What to do if there are problems with the repayment of the car loan?
Sometimes borrowers are faced with such an unpleasant situation as a lack of financial ability to make the next payment for a car loan. In this case, the following measures can be taken:
- it is mandatory to notify the bank about the encountered difficulties;
- if you do not expect to be able to make a payment for the loan in the near future, you should ask the lender to renegotiate the terms (extending the repayment period, reducing the monthly payment, and etc.);
- you can also try to find another lender who has more beneficial terms on the car loan, after which to make a refinancing;
- the last resort would be the sale of the vehicle (with the consent of the bank) and the closure of the loan with the raised money.
