People buy new vehicles for different reasons – they need a second car, their lease expired, or their old vehicle broke down beyond repairs. New vehicles are equipped with safety technology such as rear-view camera, blind spot monitoring, and lane departure warning. One of the main reasons to buy a new vehicle, however, is that banks and dealerships offer better interest rates compared to rates on used vehicles. Some finance companies even offer no-interest auto loans but think of factors such as higher auto insurance premiums, high repair bills, and depreciation. People usually buy a new vehicle because of the high trade-in value, luxury features, power, and fuel savings. If you own an older model vehicle and parts are unaffordable or unavailable, this is yet another reason to buy a new vehicle. If the engine is damaged and needs replacement, this makes sense only if all other parts are well maintained and in perfect condition.

What Factors Do Financial Institutions Take into Account to Offer Car Financing

Type of Vehicle

The vehicle’s market value is obviously an important factor and so is the vehicle type. Other factors that financial institutions take into account are the cost per month, repair and maintenance costs, and the expected depreciation of the vehicle. The cost to own, for example, depends on the model and make as well as fees and taxes, insurance, fuel, and other aspects.

Credit History

Тhe applicant’s credit and payment history are important aspects for banks. Credit rating is based on factors such as types of revolving and installment credit, number of accounts, length of credit history, and others. It is used by financial institutions to assess creditworthiness, reliability, responsibility, and financial health.

Applicant Details

The applicant’s details are also taken into consideration. Bank clients fill in details such as housing payment, time at current residence, social insurance number, housing status, and citizenship. Clients are also asked about their monthly mortgage or rent payment and income and employment details, including annual income and employment status. In general, financial institutions look at a number of factors which have different weight depending on the lender of choice. Some financial institutions also offer the option to apply together with a co-applicant.

Down Payment

A larger down payment is looked favorably by dealerships and financial establishments. The amount of the down payment depends on the value of the vehicle. If you have bad or average credit, a large down payment means more favorable terms on the car loan and interest rate. If you have good credit, putting 20 percent down will get you a competitive interest rate. You still owe 80 percent of the vehicle’s asking price, plus interest.

Other Factors

Your debt to income ratio is a key indicator for banks and dealerships as it shows your ability to manage debt payments. The higher the ratio is the less friendly the rates and terms. Customers with lower ratios and higher income levels are favored by prospective lenders and are rewarded with affordable rates and competitive terms. The car loan term is yet another factor – the longer the term, the lower the rate offered. It also makes a difference whether you buy a low-priced vehicle or a low-mileage, high-priced car.

How to Find the Best Offer

There are some tools that help customers to negotiate with banks and dealerships. Services such as carcostcanada.com offer pricing services and detailed reports with cash rebates and incentives, dealer cost information, dealer recommendations, and more. Pricing services advertise guaranteed financing for different credit profiles, from poor to good credit. Reports offer information on lease and finance programs, and there are build and price tools that allow customers to select from different models, makes, and model years. Customers are free to choose from different factory options such as air conditioning excise tax, seat trim, paint scheme, and primary paint and are offered detailed pricing summary with information on the total options price, manufacturer design charges, base price, and total price. Basically, the goal of pricing information services is to help clients to find a new vehicle at an affordable price. These services specialize in new vehicles only because subsidized financing and leasing rates and factory incentives substantially lower the price of new cars. In fact, services claim that new vehicles are actually cheaper because used cars do not qualify for cash rebates and incentives.

Lease or Buy a Car: What’s the Better Option?

Both leasing and financing have pros and cons to consider. Before you make a decision, you may want to look at your savings, monthly cash flow (income and additional sources of income), and whether you drive a lot.

Pros and Cons of Leasing

One of the main benefits of leasing is that you will pay less in down payment on the car loan. This is also a better option if your monthly income is low as the monthly payment is likely to be lower compared to financing a vehicle.  Leasing a vehicle also means lower insurance limits. Other benefits of leasing are the low maintenance costs and the fact that clients are not required to make upfront tax payments. On the down side, clients agree on a fixed ownership period meaning that they don’t actually own the car. With a lease, individuals basically rent a vehicle of their choice for a period of 3 – 4 years. This can be a good alternative if purchasing a vehicle is not an option (you need a vehicle over a short period). If you decide to keep the car, one option is to finance the car’s remaining value. And if you go for a lease for business trips, you may be offered tax advantages.

Pros and Cons of Financing

If you drive a lot and go for a lease, you will probably pay more. Financing is a better choice in this case. If you have enough for a large down payment, buying a vehicle may be a better option. Obviously, the interest rate on your car loan also plays a role. If you are offered a low-interest auto loan with an affordable down payment, then buying a vehicle makes sense. The main benefit for borrowers is that the car is theirs to sell or keep once they pay off the loan. On the downside, applicants with a fair or poor credit score are offered unfavorable terms and interest.

Conclusion

If you plan to buy a new car – there are two options to consider, financing or leasing and both are forms of vehicle financing. What matters is which option is within your financing grasp. In both cases you will need money upfront but financing requires a substantial down payment. Leasing a car helps save money. The warranty covers any repairs over the contract duration, be it maintenance, tire rotations, oil changes, or anything else. The main benefit of car financing is that you have equity in the car. This is really a lifestyle choice to make, depending on whether you have good offers on your hands.

Resources:

Car Loan Calculator: https://www.cibc.com/ca/loans/calculators/car-loan-calculator.html
Car Price Comparison: carcostcanada.com