With interest rates and car prices on the rise, car loans are becoming more expensive and car buyers maybe feeling some pre-purchase jitters. The antidote to this anxiety is good information: figuring out your budget, knowing your options, and finding the best deals.
Here are some tips for financing a vehicle in the current economy.
Knowing how much of a loan you would qualify for before searching for a vehicle is a good starting point to create your budget. It also help prevent unwanted surprises at the dealership.
You can pre-qualify for an auto loan online. To pre-qualify, you provide your financial information to the lender, including income and any current debt obligations. Based on this information, the lender will provide a tentative assessment of the loan size you would be eligible to receive.
Pre-qualification does not guarantee that your loan will be approved once you formally submit your application. However, starting the conversation with your lender early may help you plan your budget and even reduce stress.
RBC’s My Auto Affordability Tool can help make pre-qualification quick and easy.
Search within your budget
Once you’ve set your budget, it’s time to start looking for your vehicle. Here are some considerations.
Should you buy a new or used car? A used vehicle is typically less expensive than one fresh off the lot, but it’s important to do your research to ensure you’re getting a dependable ride.
In Ontario, the vehicle requires a Used Vehicle Information Package (UVIP), a Safety Standards Certificate, and a CARFAX Canada report. It’s also a good idea to take the car to a mechanic you trust for an inspection — a good mechanic may be able to warn you of costly problems down the line.
Another way to ease the bottom line of your purchase is to compromise on extra features and accessories. High-end “infotainment systems” on the dashboard that include video feeds and excessive personalization options may be fun, but they usually aren’t necessary from a practical standpoint. That goes for other features such as built-in navigation or upgraded sound systems.
Find the best rate
When financing your vehicle with an auto loan, most of the conversation will be about the interest rate. Interest is the fee you pay your banking institution or car dealership to borrow money from them. These charges are included in the weekly or monthly payments of your loan.
Interest rates vary by the lender. Per Loans Canada, the average interest rate for an auto loan in Canada falls between 5% and 6% (as of November 2022). This is a good baseline, but it’s important to remember that interest rates could be significantly higher based on financial factors such as a low credit score.
A credit score can range from 300 to 850 — with a higher score you may more likely get approved for a larger auto loan amount with fewer interest fees.
You can get an idea what your monthly auto loan payment may look like by using RBC’s Car Loan Payment Calculator.
Develop the right payment strategy
When you take out a loan, your amortization period is the time it takes to pay off both the principal amount of the loan and the interest fees.
Payments typically happen on a weekly or monthly basis, so you have a spectrum between higher payments over a short amount of time or lower payments over a longer amount of time.
Lower weekly or monthly payments don’t necessarily mean you found a good deal. It’s important to always think about the total cost of your payments when looking for auto loan deals.
Usually, a greater percentage of your payment is dedicated to interest early in the life of the loan. In comparison, later on, a greater percentage goes toward the principal amount of the loan. Paying off your loan quicker can help reduce interest costs, but read the terms before signing the contract! There may be a penalty for paying your loan off early.
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.