What to Expect When Applying for a Car Loan

If you live in northern Alberta and want to take advantage of the vast amount of gorgeous green landscape and natural parks to discover, you've likely come to learn that you'll need a reliable car. Even if you aren't an avid adventurer, you know you need a car you can trust on long road trips and through bitter winters. So, when it comes time to buy your next vehicle, and you find yourself looking into car loans, Fort McMurray drivers will likely want to see what they can afford. But if you're new to owning a vehicle or simply haven't bought a car in a while, you might not know what to expect or how to budget for a vehicle. It's no small expense. However, if you can use your new car to go on great adventures, the cost can be more than worth it.

What exactly is the cost of buying a new vehicle? The average monthly car payment in Canada is approximately $500. Can you afford a car loan? It's important to know how large of a car payment you can afford. Financial experts recommend that you budget around 10 to 15 percent of your monthly income on your car payment. We get into more of this below, so you can fully prepare for financing a vehicle and enjoying the freedoms that come with it.

Breaking Down Car Payments

So, you find a car you love, you give the car dealership some information, and they present you with the figure you'll be paying every month. You work hard for your money, so you probably want to know exactly how the dealership and lender arrived at the number.

Your monthly car payment is determined by:

• Interest rate
• Size of the loan
• Length of the loan

Now you might be wondering how the interest rate is determined. There are a few things that go into setting the interest rate. One is simply current market rates. This is the range of rates you see out there across the car loan market. Let's say, for example, that current rates sit between four and eight percent. It's unlikely that you'll get a rate far outside of that range. But the next question is: how does the lender decide what your exact rate will be?

A few factors will go into determining your rate. First, your credit history will be a significant deciding factor––as is the case with any type of loan. The better your credit history is, the better rate you'll qualify for. The type of vehicle you're financing will also determine the interest rate. Used cars tend to come with higher interest rates simply because the lender is taking on more risk by financing an older vehicle that could have issues. The next two factors aren't exactly official, but they do come up. If you've been a long-time loyal customer of a dealership or lender, they might offer you a lower interest rate. Finally, sometimes you catch a dealership during a promotional period when they're offering super-low interest rates or even zero percent APR for a certain period.

Once you've determined your interest rate, you should look at the size of the loan. Many people believe the size of the loan directly correlates with the price of the vehicle. However, remember that you can put money down. So if the car price is $20,000, but you put down $5,000, then the size of your loan will only be $15,000. If you trade in your vehicle with the dealership, they can deduct the value of your trade-in from the purchase price. Whatever figure you land on once you've taken the car's price and deducted any down payment or trade-in, that's your loan size.

Now let's say you've landed on a loan of $30,000, a term of 60 months, and an interest rate of four percent. In order to figure out your monthly payment, you'll divide the size of the loan plus the total interest you'll pay by the number of months you'll be making payments. For a loan of $30,000 at four percent paid over a 60-month term, you'll pay a total of $3,150 in interest. That means to get your monthly payment, you take the loan size of $30,000 plus the total interest payments of $3,150 and divide that number by 60. This would get you to a monthly payment of $552.50.

How to Budget for a Car Loan

Determine Your Take-Home and Total Costs

As we mentioned in the beginning, financial experts recommend that individuals pay no more than 10 to 15 percent of their total monthly income for their car. However, there are some important details to those figures. First off, determining your income is not as simple as what you "make."

The amount used for this calculation should be your take-home income after taxes. However, if you have any current debt, like credit card debt or another car payment, you should also deduct that from your take-home, and that final number is your "income." Experts recommend spending no more than 10 to 15 percent of that figure on your car.

Additionally, your vehicle costs don't only include your car payment. These also include your gas, insurance, parking, and any other expenses of owning a car. So your total monthly payment for all of those should be no more than 10 to 15 percent of your total monthly take-home income.

Get Your Credit in Order

Remember that you can get a lower interest rate if you have a good credit score, and a lower interest rate means a lower monthly payment. See if there are ways you can improve your credit score before applying for a loan. You might be able to pay down some debt or pay off an existing loan entirely.

Determine a Down Payment

Figure out what you can afford as a down payment. The more you put down upfront, the lower your monthly costs will be. Putting down more upfront will also mean paying less in interest over time since you're paying interest on a smaller amount.

You're in Control of Your Car Loan

There are a lot of moving parts to a car loan. While it can initially feel overwhelming, you'll eventually see that it means you have control over your monthly payment. By playing with different factors, like purchase price, down payment, and interest rate, you will see that you have access to many different monthly car payment options.

It is important to make sure you don't spend more than that recommended 10 to 15 percent of your total monthly income on your car. If you are able to do that, a new car can open up a lot of freedom in your life in Fort McMurray without being a financial burden. Be sure to do plenty of research to see if any dealerships are offering promotions on interest rates or discounts on car prices, as each of these could mean lower monthly payments for you. And try to do what you can to be an attractive borrower, such as paying down debts to improve your credit score. If you want assistance finding the perfect car loan, be sure to contact the team here at IDrive Canada!