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Car financing: Evaluating your options

17 December 2014 by National Bank
car finance option

Do you need car financing? Many solutions allow you to purchase your new car with credit. Here are a few options to help you determine which is best suited to you.

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Car dealership financing

All dealerships offer car financing to their customers. This allows you to get everything settled in one place. Certain vendors even offer zero or low interest with the purchase of a new car. It’s often more advantageous than a personal loan from your bank. However, financing from a car dealership is considered an installment sale. This means that the lender retains ownership of your car until it is paid in full. Their permission will be required if you want to sell your vehicle.

0% interest… really?

Pay attention to 0% interest offers from dealerships. They are sometimes less advantageous than they seem. The Office de la protection du Consommateur recommends verifying the credit rate in the contract. This includes the interest rate as well as other fees such as insurance, administrative fees, the rebate granted to the buyer if they pay in cash, etc. So even if the interest rate is 0%, the credit rate could be much higher. Note, however, that you are not obligated to take out insurance for death or disability offered by the dealer.

Car financing through the bank

Your financial institution can also offer you financing for the purchase of a vehicle. There are two possibilities for you: a car loan and a line of credit.

A car loan is particularly of interest if you are purchasing a used car. The interest rates offered by dealerships for these cars are often much higher. Unlike financing from a car dealership, you are the owner of the vehicle. You can therefore sell it whenever you like.

When the financial institution grants you a car loan, the cheque is made out both in your name and that of the dealership. This is a way of ensuring that the money is used to pay for your vehicle and not for other expenses.

A personal or home equity line of credit offers good flexibility for repayment. Plus, you can use it for other plans such as renovations or a family vacation. This option takes discipline, however, to ensure that you repay your debt.

Application for financing and credit report

No matter what type of car financing you choose, the lender will base their decision to grant you a loan on many criteria. They will consult your credit report and verify your level of debt. The bank could also require a copy of the vehicle’s sale contract. In certain cases, the criteria for your financial institution and the dealership may vary—you could be approved by one and denied by the other.

Avoid needlessly making multiple requests. When negotiating a price with a dealership, they will request access to your credit report to determine the interest rate. If you take the same approach with several dealerships, all those requests can be damaging to your credit score. It is best to limit yourself to a single request—that of the dealership or bank you have chosen.

36 months, 48 months or 60 months?

It’s tempting to spread your payments out over a long period of time to have lower monthly payments. Remember, the longer your payment period, the more it will cost you. Ask your lender the total amount you will have to pay to help you choose your loan term.

Always look for an open loan, either from the dealership or the bank. That way, you may have the opportunity to repay your loan faster if, for example, you receive a pay raise or a tax return.

Take the time to negotiate

When it’s time to purchase a vehicle, the financing conditions, sale price and options and accessories for the car are negotiable. Here are a few things to remember to help you play your cards right.

  • Look up promotions from other dealerships and don’t hesitate to bring them with you. They can be used to encourage the dealer to make you a better offer.
  • Take notes to better compare offers from different dealerships.
  • Avoid telling the dealer that you need the car quickly. This will give them an advantage in the negotiation.
  • Do not allow yourself to be charmed by an overly friendly dealer. Are you getting the impression you’re being offered a good deal? This is not always the case.
  • Negotiate optional extras and additional equipment for the vehicle as well. The dealership often has more flexibility over the price of these products and their installation. You can remind the dealer that these accessories are often less expensive at independent sellers.
  • The dealer may try to get personal information from you that they can use during negotiation. Keep the conversation focused on the vehicle you are interested in.
  • A vehicle is an important purchase and the monthly payments can take up a large part of your budget. That’s why it’s important to thoroughly do your homework before signing a purchase agreement. With the right vehicle and a payment plan that works for your wallet, you will be ready to hit the road!

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