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April 02, 2019

What Car Can I afford?

So, you’ve already made the big decision to get a car loan in Ontario—but what option will prove to be the best bang for your buck?

Owning a car is a big decision that can make an equally big impact on your finances. However, it’s not as simple as “I want this car at this price”. There’s a lot of minor choices that accumulate into making a well-informed choice for the long run. Everyone knows that it’s good to research and compare different vehicles on the market, but may not be so sure on what route is best to get their dream car– that’s what we’re here for!

The truth is that there isn’t one checklist or set of rules to follow, and the car purchasing experience is unique to each buyer and their needs. That said, when determining car affordability, there are a few general elements to take into consideration.

We’ve broken it down into a few simple steps to help make the best decision for you.

Car driving on the highway after getting a car loan in Ontario approved

The 20% Rules

First, have you saved any cash for a down payment?

Down payments affect your total loan amount and monthly payments, and can significantly relieve some of those costs. New buyers typically consider the 20% rule—paying 20% of your dream car’s cost during your initial down payment.

The other applicable 20% rule that financial experts generally encourage is spending a maximum of 20% of your take-home-pay on auto-related expenses. So, if you’re monthly take-home pay is $2000, then you shouldn’t spend more than 400 between the car itself, maintenance, gas, insurance, and other auto expenses. However, there are always exceptions to every rule, and depending on your budget, you can adjust accordingly.

Once you’ve narrowed down a realistic monthly car payment, you can begin to outline how much you may need to budget or borrow.

Break Down Your Budget

The second step in your plan of action is to break down and map out your budget.

This includes analyzing your take-home-pay, and existing and ongoing monthly expenses. Some numbers to consider are how much you’re already spending on rent or housing, other bills, your savings plan, and any other monthly costs. Whatever you have left, consider what would be a realistic and achievable monthly rate to put towards a car loan payment.

We know this initial step involves a lot of calculations but here’s the good news: you don’t have to do all the math by yourself. There are so many tools available online that can accurately help you predict the total monthly costs of a car loan, including car loan calculators!

Consider Vehicle Depreciation

Vehicle depreciation is a big factor to consider when you’re taking on a car loan.

Vehicle depreciation is when a car loses monetary value over a period of time. A car can depreciate due to a few things, including mileage, damage, or technological advances. With the rate that new cars are put out yearly, it’s generally believed that a vehicle can depreciate by as much as 10% after its first year!

Additionally, cars are understood to be a “depreciating asset”. Therefore, we don’t recommend taking on a loan that can exceed the value of a car. For example, if you purchase a car with a loan term of 10 years, there’s a very high chance that you’ll be paying for more than the car is worth by the end of year ten.

Besides, who knows what kind of cars we’ll have in ten years—maybe they’ll be flying by then!

Decide on a Term Length

Factoring a car’s potential depreciation rates is the first step in deciding on your a term length for you car loan in Ontario.

For example, if you’ve come to the conclusion that it’s not valuable to take out a car loan for more than 6 years, now you should decide what length is achievable within those six years. Do you want to/ can afford to take out a car loan for two years, or for the full six?

Obviously, taking out a loan for a shorter period is better as you’ll be paying less interest on the car overall, but the payments will likely be much higher as it will be spread out over a shorter course of time.

Again, it all comes down to your budget and deciding on what’s a realistic monthly spend for you. If you think there’s a chance you would like to resell in the future, just know that the typical mark for reselling is four years after purchase. So, your car will likely depreciate enough by year four that you may not make a sizeable return.

Keep Your Credit Score Healthy

Your credit score can significantly impact how much of a car loan you can afford.

If you have a high credit score, great! High credit scores reflect an individual’s level of financial responsibility–this usually means that you pay your bills on time, have zero or low debt, and don’t have any outstanding payments across your credit loans. In the lender’s eyes, this makes you a reliable and trustworthy consumer, and they will be more likely to take you on as a client. The best credit score to aim for is within the “excellent” range, which is usually a score of 799 and above. However, most car loan companies will usually issue a car loan to people with a score ranking in the “good” range (670+) and above.

If you don’t have what’s considered a healthy credit score, there are options available, although it will likely impact what car you can afford. Low credit scores usually result in higher interest rates, and that can cut into your monthly budget for a car loan. However, many lenders like CarLoans.ca offer a wide selection of rates dependent on your credit history, income, and more. We also understand that credit scores can be negatively impacted by unforeseen circumstances, and feel that you shouldn’t face harsh repercussions as a result. That’s why we work hard to get you the best rates possible!

There are other reasons to not worry too much about having a low credit score while applying for car loans. One reason is that car loans can actually help to increase your credit score as you’re making payments during the term of your loan. The key is to make sure that you’re making your payments on time. Payments that are made in a timely manner are crucial as you want to prove to credit institutions that you are actively working to repair your credit, and that in the future you can be considered for different levels of loans and interest rates. It typically take 12-18 months of consistent payments, but you will definitely see a rise in your credit score!

Over time, if your credit score does rise, you may even want to consider refinancing your car loan to better suit your budget. Refinancing your car would mean that you potentially pay lower interest rates and shorten your loan term, and therefore save more money for other costs.

Used Vs. New

As one may guess, used cars are much more affordable when you’re either buying a car outright or whether you’re financing it through a car loan in Ontario.

Depending on your credit score, you may opt to get a new car that will depreciate over a longer length of time, or a used car that has already depreciated in value. The perks of purchasing a used car is that you will likely be able to pay it off sooner than you would a new car, and hopefully rebuild your credit in the process. That way, by the time you’ve finished paying off your loan and the car has reached its physical limits, you may be able to afford a new car with a new (and better) car loan rate! We always recommend making choices that will positively impact your credit scores and financial situation in the long-term.

Several Cars in Parking Lot that could be available for a car loan in Ontario

Shop Around

Everybody loves a good deal, and that applies to car loans too.

Once you’ve narrowed down what type of car you want, how long you can pay a loan for, and what your budget is, it’s time to shop! Research different vendors offering car loans, and consider everything that they’re offering. Do they value customer service? Are they actually offering you the best interest rates available for the type of loan you are seeking out? Do they offer new and used cars, and what kind of selection of cars do they have?

Additionally, if you’ve decided on purchasing a used vehicle, make sure that it’s a certified pre-owned vehicle. A certified pre-owned vehicle ensures that a vehicle has been refurbished, inspected, and certified by a manufacturer or other authorities with certifying capabilities. Owning a CPO car is a safe bet as if there are any issues, the manufacturer is usually responsible for managing repairs. Additionally, certified pre-owned cars usually offer other perks like extended warranties or special financing.

As a consumer, you should aim to get the best possible option for your budget, and your lender should work to meet your needs.

Here at CarLoans.ca,we understand the level of competition that exists in the car loan world. We strive to offer the best for our consumers–including optimal interest rates, and over seven thousand cars to choose from. Our certified used cars have been put through industry leading performance tests and and inspection. We only offer a selection of high quality vehicles as that’s what our consumers deserve! If you don’t like the first car you select, you can always return it within 30 days with no associated risks. Finally, to make the car loan experience complete and prove our commitment to you as the consumer, we’ll even deliver the vehicle to you free of charge. Contact us today to find out more!

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