Buying a Car in a High Cost Environment

With interest rates and car prices higher than they have been in the past, car loans are more expensive compared to a few years ago, 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.

Get pre-qualified

Knowing how much of a loan you would qualify for before searching for a vehicle is a good starting point to create your new car budget. It also helps prevent unwanted surprises at the dealership.

Getting pre-qualified is easy and you can get it done online. To pre-qualify, simply provide your financial information to the lender, including your 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 auto financing conversation 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 that could surface down the road.

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. The same 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, your primary consideration will be the interest rate. Interest is the fee you pay your banking institution or car dealership to borrow money from them. Interest charges are included in the weekly or monthly payments of your loan and

rates vary by the lender. Per Loans Canada, the average interest rate for an auto loan in Canada is approximately 8% (as of June 2024). This is a good baseline, but it’s important to remember that interest rates can vary 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 be more likely to get approved for a larger auto loan amount with a lower interest rate.

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 and typically range from two to seven years (although there are terms that fall outside these parameters). So, you can choose between higher payments over a shorter amount of time or lower payments over a longer amount of time.

Keep in mind, 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 be sure to read your loan terms before signing the contract! There may be a penalty for paying your loan off early.

Read next: Buying Your Next Vehicle: New or Used?

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