Published September 12, 2022 • 4 Min Read
Buying a new car can be a great experience. If this is your first vehicle, you may not be very familiar with pre-qualifying for auto loans or how your credit score may impact your loan.
But there’s no need to stress — here is a quick and easy guide to help you finance your new vehicle.
How do auto loans work?
You can apply for an auto loan at a dealership or through your bank.
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If your application is approved, you can borrow a set amount of money from the lender to finance your vehicle at a pre-agreed interest rate.
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You are given time to repay this loan. This period is called your loan’s “term.”
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You pay back a pre-arranged portion of your loan and interest on the principal amount of the loan weekly, bi-weekly or monthly in your term.
What is interest?
Interest is the fee you pay your lender to borrow money from them. Interest charges get included in your weekly or monthly fee on top of the loan until your term is over.
Most loans are front-loaded: A higher portion of your payments go to interest at the beginning of your term, while more will go to the principal amount towards the end.
Different lenders will have varying policies on interest. You can check out multiple dealers before applying for a loan to ensure you get the best deal.
How do I find the best deal on auto loans?
There are a few things to consider when searching for the most cost-efficient auto loan for you. Among the most important are:
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The interest rate. According to Loans Canada, the average interest rate for an auto loan in Canada is between 5.5% and 6% as of May 2022. You could use this as a baseline to test which dealership is offering a good deal on interest.
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Your term. The duration of your loan may vary depending on the lender. You might consider paying the loan off earlier and saving more. Check if there are any fees associated if you decide to pay off your loan earlier.
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The long-term cost of the loan. Finding a good deal isn’t as simple as getting your payments as low as possible. It’s important to focus on the overall sum of loan payments, and not just what the monthly payment is. Low weekly or monthly payments stretched over time may cost you more over time. Making higher payments helps you pay the loan off faster, which can save you money on interest.
Some lenders will also have lower credit score requirements to secure a loan, which makes them more accessible.
RBC’s Car Loan Payment Calculator allows you to quickly check how your interest rate, down payment amount, and financing term may affect your loan payments.
What is a credit score, and where can I check mine?
Your credit score can be a big factor in securing a car loan. It’s a three-digit number that gives lenders a quick overview of the amount of debt you have and the length of your credit history. A higher number means you consistently pay off debts, which may make you more likely to get approved for a loan.
Typically, the scoring system works like this:
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350-650: Below average
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650-725: Good
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725-760: Very Good
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760-900: Excellent
Most dealerships will have a minimum credit score requirement to secure a loan, but clearing that bar won’t guarantee your loan gets approved.
Did you know?
RBC Online Banking clients can check their credit rating through their accounts without affecting their credit score.
What can I do to help get approved for a loan?
Every car loan application is evaluated based on many factors, including credit score, income, employment information and debt obligations. When you have a good understanding of your finances, you can set a reasonable budget before visiting a dealership.
Getting pre-qualified is also a good step before formally applying for a loan. Pre-qualification doesn’t guarantee approval, but it gives you an idea of what to expect by starting the conversation. Your lender will look at your credit profile as if you’ve submitted a loan application and estimate the loan’s terms and its likelihood of approval.
Read next: Financing a Car: Should You Buy or Lease?
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.
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