When you’re purchasing a vehicle, odds are extremely high that you’re borrowing money for it. Who has money saved to buy a car outright anyway?
Whether you’re in the market for a new car, a used vehicle, or a certified pre-owned car, you’ll want to find the best way to finance a car to keep the most cash in your pocket, and Canada Drives is here to help you with that.
Cash, leasing, financing, or spending your savings: how do you decide which option is best for your financial situation? What are the pros and cons, and how do you find the best deal on the car you want?
Cash vs. savings vs. finance
The average Canadian family has just $852 in their savings account, making it unlikely you’ll be paying cash for your car. And even if you have the cash available to you, a car is a purchase that depreciates quickly – smart money is invested to earn interest, especially if a low-interest car loan is an option.
Perhaps you have a GIC, TFSA, or RSP that could cover your new car, so you don’t have to make payments. Good on you for investing it, but withdrawing your savings isn’t a good idea. You’ll be paying tax on it as income if you withdraw it. You’re better off leaving your money to earn interest for you like you intended originally.
Financing a car is an expense, and there’s a cost to borrow money – specifically, interest charges. In almost any situation, the costs associated with financing a vehicle purchase are small, and they allow you the financial flexibility to put your money to work in other ways.
But what type of auto financing is right for you? Let’s explore if a personal loan or a car loan is the way to go.
Can I use a personal loan to buy a car?
When you need to get a loan to purchase a vehicle, one option is a personal loan. What’s unique about a personal loan in most cases is that it is unsecured, meaning you don’t have collateral attached to the money you’re borrowing. Furthermore, the funds you borrow can be used for literally anything you want to buy.
Obtaining a personal loan in Canada is simply a matter of meeting the qualifications and filing an application at a bank, credit union, or online lender.
Regardless of where you get a personal loan, the process is the same.
- Complete an application with your personal information and documents to support your loan request.
- Your application is reviewed to determine your eligibility for a loan.
- The term length and interest rates are established by the lender.
- If your request is approved, funds can be transferred to your bank account as quickly as the same day.
Personal loan vs car loan: pros and cons
A car loan is different than a personal loan due to one big fact: you can only use the money to purchase a specific vehicle. But if you’re shopping for a vehicle anyway, that’s not going to be a problem. A car loan is a secured loan which means that the vehicle you buy will be used as collateral. With security backing your loan application, there is a higher chance of approval and better interest rates compared with an unsecured personal loan.
To get a car loan, you can walk into any bank or dealership and submit an application. The finance manager will send your application to a lender who reviews it and decides whether to issue the loan or not.
If you’re ready to buy a car today, it's wise to get pre-approved for auto financing before you start looking at vehicles. With Canada Drives, you can get pre-approved for a car loan without leaving your home - allowing you to shop with confidence knowing exactly what you can afford.
A personal loan vs car loan – which is the better choice for you? Each comes with its own benefits and drawbacks, but they’re both options when you’re buying a new vehicle.
The benefits of a personal loan for buying a car include:
- Flexibility. You can choose any car you want, as long as you have the funds available.
- Fixed terms. You’ll know your interest rate and term length ahead of time.
- The option pay for other things besides your new car.
- The option to choose a secured or unsecured loan.
Do your research about a personal loan:
- With an unsecured personal loan, the interest rate is often higher than a comparable car loan.
- It can be secured using something of value such as collateral, but rates are still higher in many cases.
For a car loan, benefits often include:
- Lower interest lending (compared to an unsecured personal loan) with terms up to 84 months – or even longer.
- Fast applications and funding so you can drive away sooner, often the same day!
- More relaxed requirements to qualify for a loan.
However, a car loan has a lien on the title until it’s paid in full, so your car isn’t your own until the final payment is made.
Should I lease or finance?
In Canada, nearly a third of new cars are leased rather than purchased. Even some certified pre-owned vehicles are eligible for leasing too. But when you look at your options against each other – leasing vs financing vs cash – how do they compare?
We’ve already reviewed financing options and cash purchasing. Leasing opens the window to driving a vehicle with low monthly payments over a shorter term. The biggest difference between buying a car and leasing a car is that, when the term is over, you return your leased car.
You can either lease or purchase a different car or you may choose to buy out the residual value of your lease. It’s a popular option because of its flexibility.
With leasing, keep in mind that:
- There may be excess wear-and-tear and over-mileage charges to pay at the end.
- You won’t have equity in the car you drive.
- You’ll be starting from scratch after you turn in your lease.
How much car can I afford?
Wondering how much you can afford to spend on a car? It depends on a handful of factors including:
- Your monthly income
- Your previous credit history
- Your current credit score
- Your existing debt load compared to your income or debt-to-service ratio
- How much money you have as a down payment
We can help you determine how much you can afford to spend on a car with our Auto Loan Calculator from Canada Drives.
What is the best time of year to buy?
Everyone’s always asking, “When is the best time to buy a new car?” The honest truth is that the best time of year to buy a car is… when you need a new car! Whether you’re shopping for a new or used vehicle, you’ll find specials at any time of year – Christmas, New Year’s, Thanksgiving, Canada Day, and more.
What’s the best way to finance a car with bad credit?
If you’ve been declined for auto finance at a dealership or bank, it’s usually because your credit rating isn’t strong enough. When this happens, you can either wait until your credit score improves or you can work with a dealership or retailer that knows how to help all credit situations.
Canada Drives can get you pre-approved for a car loan regardless of your credit score. You will even get matched with a dealership in your area who will have a selection of quality cars available for you to choose from, that you already qualify for! So you can save time by not having to shop around and look at cars you may or may not get approved for. No more fear of rejection in the finance office!
Click here to get pre-approved for your car loan.
