The car loan: better understand it in order to use it properly
Many young drivers use their savings to afford the first car. This is a great way to avoid debt and learn to manage your money well. When the time comes to buy a new or more expensive vehicle, it is advisable to resort to credit to facilitate the transaction. Why, and most importantly, how to use auto credit to your advantage to get your hands on your next vehicle? You will find the answers to your questions in this article.
How does auto financing work?
Personal loan and car loan: what are the differences? What are the particularities of an auto loan? There are a few things that distinguish these two forms of credit. One of the distinctions is that the car loan is obtained directly from the merchant and the personal loan is obtained from a financial institution. Another important difference is the interest rate on the financing. The rates are lower for a car loan because it is an installment sales contract (CVT) where the vehicle serves as collateral for the amount loaned. It is therefore particularly advantageous to use this form of credit when purchasing a more expensive vehicle directly at the point of sale. In addition, the credit application process is taken care of by the merchant. Keep in mind that you will often find the most competitive interest rates at dealerships.
Also, note that an auto loan takes effect upon delivery. It is only when the vehicle is in your hands and complies with your requests that you must start paying your monthly payments. To obtain a personal loan, you must do the procedure with your financial institution and if it is accepted, the loan will be opened and the amount will be transferred to your bank account. The loan will, therefore, be activated from that moment, and at the same time, the repayment process will start.
Why choose a personal loan? Personal credit is more appropriate in certain situations. For example when you buy a vehicle from an individual. You will have to go through your financial institution to obtain a personal loan according to the negotiated amount. A personal loan will also be your best option when buying a vehicle under $ 5,000 from a dealer or dealership. Generally, auto credit is offered at the merchant for financing over $ 5,000. It is therefore advisable to take a personal loan for the purchase of a low-cost car or when buying from an individual.
What are the steps to apply for a car loan?
A lot of people have never done business with a dealership. So what happens when you go through the doors and choose a vehicle? The salesperson will take you to the office of the business manager (F&I). How will it be afterward?
1) The dealer will ask you how you want to pay for your car. Some people pay cash, but most buyers need a loan that is spread over a period of time. The merchant will make you an offer. This is when you have to negotiate terms with which you are comfortable. Bad credit no money down car dealership can help you in this case.
2) He will then contact a financial institution to offer you a loan. Do not hesitate to let your merchant know which financial institution you would like to do business with. And if you are a member of Desjardins, you can benefit from a 0.30% discount on the interest rate on your financing at the merchant or at the dealership.
3) The financial institution will check your credit report. Any lender doing a credit analysis for a large transaction will need to know your debt level and your ability to make your payments. The financial institution will have access to this information in your credit file
3)You will sign the contract. This step is of course conditional on the acceptance of your loan application. It is important, before signing, to confirm the information that appears in the contract, such as name, address, loan amount, etc. The payment terms can be changed later by the financial institution, the name of the borrower, with difficulty.
This will be the start of the refund. Once the contract has been signed and the vehicle in hand, you will then begin your payments according to the frequency chosen at the merchant (every week, every two weeks, or every month).
Mistakes to avoid in order to maintain a good credit score
How do you make sure you maintain an excellent credit score? You must first know the variables involved in calculating the score: payment history, the level of debt compared to the credit rating, credit applications, types of credit used, experience credit, and bankruptcy history. You will need to use these variables to your advantage, which means:
Avoid making multiple credit applications. This is a still poorly understood aspect of credit. Multiple credit applications or one denied credit application will lower your score and make subsequent applications more difficult. Shop for deals from different dealers, but only apply for credit when you’re ready to buy.
Don’t aim beyond your means. Establish an automobile budget that takes into account the duration of the loan, the total price of the vehicle, the number of monthly payments, the interest rate, credit costs (insurance products, costs related to the Register of personal and movable real rights (RDPRM), etc.) as well as maintenance costs. There are many expenses associated with buying and financing a vehicle. Make sure you calculate all the variables in order to avoid unpleasant surprises and to fully understand the scope of this financial commitment.
Do not accumulate debts. The debt level is not only calculated by the total sum of your debts, but also the number of debts you have, as each of them accumulates interest. Make sure you take this factor into consideration before buying on credit. Accumulating credit cards is a common way to fall into this trap. Limiting yourself to one card is a winning choice for maintaining your good credit score.
How to build or improve your credit report?
It’s inevitable, a bad credit score will limit your options and could push up the interest rate when shopping for a vehicle. However, there are ways to fix it. Good credit is built. Here are some ways to do it.
1) Buy on credit. Good credit is not the absence of debt but has demonstrated the ability to manage it. Using a credit card responsibly by paying, for example, the full balance each month is an easy way to build or improve your score.
2) Get help with a first loan. Calling on a co-applicant – either a family member or a spouse with a good credit report – will facilitate the approval of the application and will allow you to build your credit report afterward. In addition, for a first loan, if you do not have a co-applicant, make sure you have a cash amount (from 10% to 20% of the total amount) to apply to the transaction to facilitate the approval of the financing. Going for a shorter term can also help.
3) Build good payment habits. Easy to say! It’s all a matter of strategically managing your budget. How many bills do you have to pay? Do you have the financial capacity to pay them each month? Can you cut something from your expenses? An invoice refunded within thirty days will work in favor of your credit report. 4 If you exceed this period, it will gradually be affected.
4) Be patient! Large debt on a bank account or credit card can seem intimidating, but see it as an opportunity to build credit. Demonstrating the ability to pay hard over a long period of time is a great way to achieve your goals. There is no quick fix to building a good credit score in a short time and opening multiple accounts and joining multiple cards instead adds a negative mark to your record.
Factors to consider when applying for a car loan
Congratulations, you have decided to get a new car! What should you keep in mind when applying for a loan? Be sure to consider the following factors.
Make only one shop around, do as many test drives as it takes to make a choice you’re comfortable with, compare merchant offers, etc. Remember, however, to only apply for credit once when you’re ready to buy. Applying for credit with multiple merchants could negatively affect your score even if they are accepted, as the number of requests itself is part of the calculation.
Calculate the total amount payable. The monthly payments over a seven-year term will of course be lower than over a five-year term, but will you end up paying more if you factor in interest? Calculate the total amount payable based on your term, including interest, and then you can make an informed financing decision.
Choose payment terms you are comfortable with. At the transaction stage, it is possible to choose a payment interval: every week, every two weeks or every month, for example. Take your budget into account and keep in mind that the future often holds unforeseen events. The idea of paying off your car loan quickly is appealing, but paying it off comfortably is a two-fold winning proposition: you will have the flexibility to make other purchases and build your credit in the process!
You are now better informed about auto financing! All you have to do is put your knowledge into practice when buying your next vehicle and ride with your head rested!
