What You Need to Know About High-Interest Car Loans in Canada
Buying a car is a significant financial decision, and understanding the implications of a high-interest car loan is vital. Here are three essential aspects about high-interest Canada car loans you should know.
Understanding How Car Loans Function
Your car loan’s interest rate depends on several factors that lenders consider. Here are the three key ones:
1. Credit Score
Your credit score plays a vital role in your car loan’s interest rate. There isn’t a universal minimum credit score for car loans; it varies from lender to lender. Generally, you would need a credit score of around 650 for an easy car loan approval. The rule of thumb is, the better your credit score, the lower your interest rate.
2. Down Payment
Paying a substantial amount upfront for your car can improve your loan-to-value ratio, leading to a better interest rate. The loan-to-value ratio is the comparison between the amount you borrow and the value of your car.
3. Loan Term
A car loan usually lasts between three to seven years. Lenders tend to view longer loan terms as riskier, resulting in higher interest rates. Other factors include your income, existing debts, and the loan amount.
Car Loan Interest: An Overview
The type of car loan you choose determines the amount of interest you’ll pay. Here’s a quick look at how it works:
Simple Interest Car Loans
In a simple interest car loan, if you pay more towards your loan and decrease your total loan amount, your total interest also decreases. This type of loan offers more flexibility in payments.
Precomputed Car Loans
In a precomputed car loan, the total interest you’ll pay is calculated beforehand. This means there’s no benefit in paying off your loan early.
When it comes to choosing between the two, a simple interest car loan is usually the better choice. It allows you to pay less interest if you can pay off your loan faster.
How to Save on Interest Charges
High-interest car loans can add a significant amount to your total repayment amount. Here are some strategies to reduce the interest you’ll have to pay:
Get a Co-Signer
Having someone with a good credit score co-sign your car loan can reduce your perceived risk to the lender, leading to a lower interest rate.
Opt for a Shorter Loan Term
If you can afford higher monthly payments, choosing a shorter loan term can reduce the total amount of interest you’ll pay.
Make Early Repayments
If possible, make additional lump-sum payments towards your loan balance, especially if you have a simple interest loan.
Adjust Your Payment Schedule
Choosing to make payments every two weeks instead of once a month, or rounding up your payments, can help reduce your loan amount faster.
Consider Refinancing
Refinancing your auto loan can be a good option if interest rates drop or if your credit score improves after getting your car loan.
Conclusion
While car loans make vehicle ownership possible for many, high-interest loans can add significantly to your repayment amount. It’s vital to understand these aspects of high-interest Canada car loans and to adopt smart financial habits to secure a low-interest loan.
If you need personalized financial advice to improve your credit score, reach out to us today. Our credit counselling experts can guide you to better manage your finances.
