If you’re in the market for a vehicle and plan to finance your new ride, it’s crucial to understand the various factors that influence the terms and conditions of your loan. From varying interest rates to the total amount of your loan and more, there are multiple different considerations that help determine how much you’ll pay, as well as what you’re eligible for from different lenders. By knowing what criteria count towards your final cost, you set yourself up for success and give yourself the benefit of walking in informed to secure the best loan possible. 

At Auto Loan Hub, we know that buying a car–and taking out a loan to do so—is both exciting and daunting for most Canadians. Guided by years of industry experience and a passion for equipping shoppers with the knowledge they need to shop, buy, and finance with confidence, we’re here to help break down any barriers to car ownership. 

Below, we’ll cover five core factors that influence Canadian car loans and how you can prepare yourself to score the best rates possible. Read on to learn more!

Credit Score

It shouldn’t be a huge surprise that, like with most major purchases, your credit score plays a significant role in the financing options available to car shoppers. In Canada, credit scores range from 300-900, with the higher end of the scale typically indicating a lower financial risk for lenders. Scores above 650 are generally considered to be in good standing, with scores above 700 being considered even lower risk. The lower your risk profile for lenders, the more likely you are to qualify for a loan with favourable terms, such as a lower interest rate and flexible repayment options. 

Before applying for a car loan, it’s a good idea to check your credit score and clear up any outstanding bills or issues that may be contributing to a lower score to ensure you’re able to access the best options possible.

Income and Employment History

Lenders want to ensure that they’re loaning to individuals with a stable income and method of repayment. This means that your employment history, as well as your current income, factor into your perceived creditworthiness. Creditors typically prefer clientele that have been in their current position for at least a year and are able to provide proof of consistent income. This doesn’t mean that self-employed individuals won’t qualify for a car loan, but it does mean that you can get ahead of this challenge by preparing thorough documentation such as tax returns or bank statements to increase your chances of being approved.

Loan Term

The length of your car loan, or loan term, is another crucial factor that influences both your monthly payment and the total cost of the loan. Car loans in Canada typically range from 36 to 84 months (3 to 7 years). While many may like the lower monthly payments associated with longer terms, it’s important to be aware that longer loans typically also include higher interest rates. This means that, even though you may “save” up front, you’re actually paying considerably more over the lifetime of the loan. Paying more on a monthly basis may feel less ideal, but paying off the loan faster means you’ll save on interest. When deciding what term works best for you, always consider what you can presently afford and aim to strike a viable balance between both short and long-term savings. 

Down Payment

If you have the ability to leverage your current vehicle for trade-in value or put down a sizable down payment on your new car, this will significantly affect your loan terms in a positive sense. A larger down payment reduces the amount of money you need to borrow, which can lead to lower monthly payments and better interest rates. It also reduces the lender’s risk, as they’re financing a smaller portion of the vehicle’s price.

If you aren’t able to make a sizable contribution to a down payment, you may still be approved for a loan, but it’s important to be aware that you’re likely to receive less favourable terms. With this in mind, we recommend trying to save for a decent contribution to help lower your overall financing costs wherever possible.

Vehicle Type and Age

Finally, the type of vehicle you intend to finance will directly influence how much you’ll be required to pay. New cars often come with lower interest rates because they are considered less risky for lenders. However, they tend to have higher loan amounts, which means higher monthly payments or longer loan terms. Used cars, on the other hand, usually have higher interest rates, and lenders may set limits on the loan-to-value ratio, meaning they won’t finance the full amount for an older vehicle.

When shopping for a new car, consider how the vehicle’s value and condition will affect the terms of your loan; while you may want a brand-new, off-the-lot vehicle, it’s often worthwhile to invest in a used car with a lower total cost. 

Buy with Confidence

At Auto Loan Hub, we’re committed to helping Canadians navigate the car financing process with ease. Whether you’re a first-time car buyer or looking to upgrade, our team is here to guide you through the complexities of auto loans and find the best options tailored to your needs. Contact us today to get pre-approved for your next vehicle!