Buying a car is an exciting experience, but for first-time buyers, applying for auto financing may feel complicated — or confusing.
Here’s an easy guide to understanding auto financing and help you get the best deal.
Car loans: the basics
With car loans, you borrow a set amount of money from your banking institution or car dealership at a pre-agreed interest rate. Then you are given time to pay it back — this is your “term.” You pay back a pre-arranged portion of your loan weekly, bi-weekly or monthly in your term. Throughout the term, you also agree to pay interest on the principal amount of the loan.
It’s a relatively simple process on paper, but there are a couple of important things to do to get started:
1. Shop around and compare rates
The terms and interest rates of car loans can vary between different dealerships. Doing some extra research can parse out the best deal in your vicinity. Here’s what to look for:
- Loan amount — Most lenders have a minimum and a maximum amount for the loan they offer.
- Interest rate — Make sure you shop around for the best and lowest rate possible, as this can add to the overall borrowing cost.
- Loan term — Loan terms could typically vary between 36 to 96 months. Your monthly (or weekly) payment and the overall sum of the loan you pay back depend on the loan term. Low weekly or monthly payments stretched over time may cost you more in the long run. Consider the total loan value you’ll pay back when deciding on a loan term.
2. Check your credit report
Your credit report is a statement of your current credit situation, which includes the amount of debt you have and the length of your credit history. That information will determine your credit score. Your credit score is a three-digit number that ranges from 300 to 850. The higher the score, the more you will likely get approved for an auto loan.
RBC Online Banking clients can check their credit rating without impacting their credit scores.
3. Pre-qualify for an auto loan
It’s best to get an estimate of what you can afford before you start shopping for a vehicle. Pre-qualification is generally a quick, simple process. You provide your financial information to the lender, including income and current debt obligations. Based on this information, the lender will provide a tentative assessment of how much they’d be willing to lend you towards your vehicle purchase.
Pre-qualification does not mean guaranteed approval for your loan once you formally submit your application. But it may help plan your budget and reduce the chance of unwanted surprises or disappointment.
RBC’s My Auto Affordability tool makes pre-qualification quick and easy.
4. Understand the terms
Read the contract. Once you’re ready to sign an auto loan, make sure you know what you agree to. The lender may add requirements such as requesting certain insurance policies or requiring you to pay a penalty for paying the loan off early.
Be on the lookout for fraudulent auto loan contracts as well! If it looks too good to be true, there’s a good chance it is. Sometimes scammers will claim they have “guaranteed approval” for auto loans without a credit check, or they will offer a great rate and later tell the borrower they no longer qualify for the rate and charge them higher fees. So its very important to read the contract and go with a loan provider you trust.
5. Shop around for auto insurance
Get insurance quotes for the vehicles you are thinking about leasing or buying before you close the deal. The year, make and model of a vehicle may affect the cost of your insurance. Some cars have a higher likelihood of being stolen or being in more accidents, so insurance companies charge more to insure those vehicles. By checking on rates in advance, you might save a significant amount in insurance premiums over the life of your vehicle. Be sure to check your policy every year to ensure that all the information is accurate and up to date. Ask questions in case there are discounts your insurance company offers that you qualify for.
This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.