6 Keys Elements that Make Up Your Car Loan
A car loan is often the second largest borrowing decision most of us will make in our lives – second only to a mortgage. Understanding how car loans work is key to feeling confident in your vehicle purchasing decision.
The Total Amount Borrowed
Your total loan amount will be determined by the price of the vehicle, add-ons and accessories, and things like credit insurance.
Your Finance Rate
The interest rate for your car loan will be based on 3 main factors: your credit history, the age of the vehicle you’re purchasing, and the term (length) of the loan.
The Loan Term
The term of your loan is the length of time you will be making payments. Car loan terms often run between 4 and 8 years and are talked about in months – it’s common to see them listed as 60 months, 72 months… you get the idea.
A down payment is a lump sum of cash you put towards your vehicle purchase, which lowers the total amount borrowed, but does not lower the amount of tax you’ll pay (if you are not tax-exempt.) For example, if you’re buying a truck and the total amount is $25,000, and you give the seller a down payment of $5,000, your total cost of borrowing will be $25,000 plus applicable taxes, minus your down payment of $5,000.
A Trade-In Vehicle
If you already have a vehicle that you would like the seller to take in on trade for your new car, this is called a “Trade-In”. To figure out how much to give you for your old car, the dealer will look at a few different things. These will include the car’s Book Value, the mileage, and the condition of the vehicle. The Book Value is just what it sounds like, surprisingly! Every month, there is a book sent out to all the registered dealers letting them know what the value is of used vehicles. These values are largely determined by the market demand, and how much vehicles just like yours are selling for across Canada. This gives the dealership a rough idea of what they should be paying for your car. A Trade-In also gives you some special tax savings, if you are not already tax-exempt. Let’s use the same example we did for the cash down payment. Let’s say the dealer is giving you $5,000 for your trade-in. So the new truck is $25,000, you subtract the $5,000 for your trade-in, leaving a balance of $20,000. Now, assuming you’re not tax-exempt, you’ll only pay sales tax on the remaining $20,000.
Payment frequency is how often you will be making your car payments. The most common options are monthly (one a month on the same date) or bi-weekly (a smaller payment will be taken once every two weeks.)