June 14, 2019
Car loans are not the same in the US and Canada. There are different terms and conditions, different rates, and different qualifying criteria. When you are ready to purchase a car in Canada, you need to learn about a few different loan features, unless you plan to pay cash for the new vehicle. Although you can visit a dealership in person, there are many innovative ways to make a car purchase using financial technology, or FinTechs, to facilitate the transaction. Learning about interest rates, what is available, checking credit, and applying for loans can all be done using FinTechs, and help to streamline the process.
First, there are some similarities to discuss. Both the United States and Canada offer both lease and purchase options for new and used vehicles. Both countries require credit checks before assigning an interest rate or monthly payment amount. And, both will offer varying loan terms and conditions.
Canadian car buyers will notice several differences compared to vehicle purchasers in the United States. One thing that is important to know is that the terms for Canadian buyers have changed over the past several years, and those purchasing vehicles may notice terms and conditions have changed. Many car loans in Canada are now being set at 84-month repayments or seven years. This is longer than the average of four to five years in America. While this may make the payments lower on a monthly basis, Canadians may ultimately pay more for vehicles than their southern neighbors. Lenders are happy to extend these terms because they will eventually make more money because of higher interest payments overall. This extended period is not great for many consumers; however, since many car buyers end up ready to get a new vehicle before their seven-year payment term ends, leaving them with a balance to pay off before they can finance a new vehicle.
Canadian car loans often have higher interest rates than American car loans, which is why lenders are offering longer repayment terms. They are able to offer somewhat lower interest rates when the repayment terms are longer because they can make up the loss over a few more months.
Many people are opting for the longer repayment terms because they may be able to afford a more expensive vehicle than they might with shorter loan terms. When the payments are spread out longer, then it is not as painful to make a car payment, since it can be a bit lower than it might be for an American car loan. The automotive industry is probably in favor of this trend, since they may be able to sell some pricier models when lower interest and longer terms are involved.
Car buyers in Canada who opt for longer loan terms and do not end up keeping their car until the entire loan is repaid will be in for a shock when they try to trade in or sell their vehicle. Because they still owe a good amount of money, they will not reap the best trade in benefits, nor will they be able to offset the remaining loan costs by selling their cars privately. This is one huge advantage to having a shorter loan term. When you try to sell a car that is completely paid off, there is a little more wiggle room in the selling price, since your profits won’t go entirely toward satisfying an existing loan. This is often a situation referred to as being upside down or underwater in a loan, meaning that you owe more on the loan than the item (e.g., car) you are selling is really worth at that point.
Additionally, insurance companies have certain requirements when it comes to insuring vehicles. If you owe money on the car, your insurance premiums will typically be higher than if you own the car completely. The insurance company needs to make sure that if the car is completely totaled in an accident that they will not be paying more for the car than it is worth. Those who are insured often have a rude awakening if they are in an accident with a six-year-old car, finding out that the value they can get from an insurance company will not cover the remaining amount on the loan. Insurance values are often based on the manufacturers’ standard retail price (MSRP), and this may not be the same as what is owed on a vehicle, especially if it is not in mint condition. Having this kind of debt to pay off will impact a person’s ability to get a new car loan because the existing payments will affect their debt-to-income ratio, and make it look like they don’t have enough money for the new car loan.
While there is a difference between American and Canadian car loans, both have their distinct advantages and disadvantages. You can take longer to pay back a Canadian car loan but may pay more interest over the long term. You may pay less overall for an American car loan but have a higher interest rate. Some people may have the option of looking into both scenarios, and hopefully, be able to make the best financial decisions.