What Are Common Car Loan Terms?
If you’re a prospective buyer looking to get a car loan in Brampton, you’ve come to the right place.
Purchasing a big-ticket item like a vehicle can seem like a daunting task, but it won’t seem quite as overwhelming when you’re equipped with the right vocabulary! Getting a new whip comes with a lot of factors to take into consideration—things like truly understanding your credit score, maintenance-related concepts, and car loan terminology.
If you’re feeling unsure of where to begin, fear not! We’ve compiled a collection of must-know terms that will indubitably help you score your perfect ride.
What better way to start off this glossary than by defining what a car loan actually is?
Car or auto loans are personal loans provided to individuals seeking help in financing and/or purchasing automobiles. There aren’t many people in this world with the means to afford their ideal vehicle with cash upfront— hence the creation of auto loans!
Car loans help people successfully make big car purchases without breaking the bank or affecting pre-existing, untouchable expenses. The loans are usually paid on a monthly basis until the loan and its associated interest is fully paid off.
Okay, most adults have a general understanding of what a credit score is, but may not understand its meaning and purpose within the car world.
In case you need a refresher or brief introduction, a credit score is a three digit number that is assigned to an individual based on their credit health. If you have a high score in the “very good”(720-779) or “excellent” (780+) range, the easier it will be to get approved for lower car loan rates.
If you’re unable to pay for a car in full and require a car loan in Brampton, most lending organizations will cut off their approvals in the 620-650 range. However, not everyone has attained a score higher than 620 for varying reasons and there are lenders who recognize that and can offer alternative plans or rates.
That said, there are also organizations who unfortunately take advantage of low credit scores and charge interest rates through the roof (which is why it’s important to be educated on credit scores!). Ultimately, the higher the score the better.
Many new car buyers, or even repeat buyers share a misconception about what the real cost of a car is.
The “total price” of a car purchase is comprised from more than what you see on the shiny tag at a dealership. There are other costs in addition to the sale price of the vehicle, including sales tax, interest (if you are choosing to finance your car loan in Brampton), insurance and registration.
If you’re purchasing a car with the assistance of an auto loan company, there are usually two rates mentioned, with interest rates being one of them.
Interest rates are one of the, if not the most important variables in a Brampton car loan equation and should definitely be accounted for when trying to establish how much you can afford. An interest rate is a percentage charged to you by your lender for the advantage of borrowing money over the course of a predetermined period of time.
They vary depending on a number of factors, from how much of a down payment you made, to credit scores, to how long the lending period is, to if there are any risks involved in the lending process. Just so you get a general idea of what interest rates look like, they typically start at 4.9% for used vehicles, and are higher for those with bad or no credit history.
Annual Percentage Rate
Annual percentage rates are a percentage of the combined costs of
1. Interest accrued from the first payment a consumer makes
2. The total cost of financing a vehicle, and
3. Any additional related fees.
Comparing APRs when car loan shopping is a very useful tool as its gives consumers insight on the market and what finance costs will work best for them.
This is another term that is applicable to many forms of purchases, but has various implications in the world of car loans. A down payment is a monetary amount that a consumer is willing to put “down” for their purchase (in this case, a vehicle). The more you pay initially during your down payment, the less you have to pay on your total cost and consequently monthly payments. Large down payments also generally lead to low interest rates.
Depreciation is the devaluation of an asset–in this case a vehicle, over time.
Depreciation can occur due to the physical condition of the vehicle, mileage, age and competition. In this time and age, technology also plays a large factor in the depreciation of cars. A 2019 model may have a cutting edge reverse camera system that a 2018 model didn’t have, or it may have Bluetooth speakers while cars from 2010 only had CD systems installed!
Many people only consider depreciation as an after-the-fact result of car ownership but it can play a huge role in purchasing decisions as well. If you can calculate how much a car may depreciate over a certain amount of years, then you can calculate how long it makes sense to finance a car.
For example, you don’t want to finance a car and pay interest over a period of 8 years as it may be more costly than the car is worth at that point. Understanding depreciation can help to budget monthly payments, get a better idea of whether a new or used car is the right choice for you, and ultimately help your finances in the long run!
Sales tax is a government imposed consumption tax (percentage of total sale cost) on goods and services.
Most people don’t take sales tax into consideration for smaller purchases, but when you’re purchasing a vehicle costing thousands of dollars it certainly adds up. Factoring in sales tax as you calculate a realistic monthly loan repayment budget is useful in that it can prevent highballing your estimates.
Term in the case of financing cars simply means the period of which you will be making payments toward your purchase.
The length of a term varies for everyone as there are numerous things involved. If you paid a sizeable down payment, you have less to pay off, and therefore are more likely to pay off monthly instalments in a shorter time. Shorter terms also generally equal lower interest rates, and that’s always a good thing. A general rule of thumb is to avoid financing a car for any longer term longer than 6 years.
Payment frequency refers to the amount by which a consumer will make payments towards their car financing program.
Some people opt to pay biweekly (every two weeks) or monthly. The payment frequency doesn’t alter or negatively impact other aspects of financing a car, unless you miss a payment of course! An easy tip to ensure you make your payments on time, whether it’s biweekly or monthly, is to sync it with your pay day schedule.
Refinancing a car loan in Brampton is the same thing as financing a car loan, except its aim is to achieve better outcomes the second time around!
Some people refinance a car with their current auto loan creditor, and others move to different companies with better, more competitive rates. A common reason for refinancing a car is that it can actually serve as a great tool for improving credit scores. After regularly making payments for twelve to eighteen months, you may notice your credit score rising once again. An improved credit score can result in being approved to refinance your loan, drop your interest rate, and save a few bucks!
A loan to value ratio is an equation calculated by the lender to assess loan risk and determine what rates they are comfortable with offering a consumer.
The LTV = Loan amount / Car value. So, if you’re looking to buy a car for $20000 and need to borrow $20000, your LTV would be 100% (very high). The higher your LTV, the more of a risk you pose to a potential lender. The best way to reduce your LTV is to limit how much you want to borrow, but life happens and sometimes it’s out of your control. If you’re initially put on a long-term plan with a high interest rate, you can work towards refinancing your car.
In the car world, rebates are often great for a new buyer.
Rebates are a “refund” that is usually given to the buyer in the form of cash back offers or lowered interest rates. They were created as a marketing tactic to close sales and block out some of the saturated competition in the automobile industry. It’s important to note that this rebate is offered by the manufacturers of the car and not the dealership itself, so it’s not technically a discount.
However, it’s still money saved no matter who offers it. If a car is $20000 and you get a $3000 rebate, then you pay $17000 for the car. However, if you negotiate with your seller, and get your price down to $19000, then you can pay $16000 and have a total savings of $4000, which is not too shabby at all. Rebates help reduce some of the initial costs involved in purchasing a car and ultimately aid the reduction of car loans and terms.
Unlike the other terms explained thus far, trade-in value is usually applied exclusively to cars!
The concept is easy to grasp: it’s the value that a dealership, private sales group, used car shop, or auto loan company is willing to pay for your current vehicle. The amount that you are credited will go towards a new vehicle purchase. Issues like depreciation, mileage, and the maintenance of the vehicle will all be considered by the purchasing agent when determining the trade-in value.
If you think you’ve received a low offer, or weren’t given an offer at all, you can always consider making a private sale yourself to earn that extra cash
When financing a used car, we highly recommend only looking into cars that are certified pre-owned.
If a car has this designation then you can trust that it’s gone through a thorough inspection process and been certified by the manufacturer. Why is this better than just getting any used car? If you come across any issue with your vehicle post-purchase, it is legally easier to get the problem resolved. Without having a CPO car, the seller could avoid paying for repairs or recalls on technicalities— and trust us, it’s better to avoid that headache!
We hope the definitions listed above get one major point across: the importance of making an informed and well- researched decision in the car loan process! Now that you have the knowledge, you can confidently seek out a fair financing program that works best for you and your financial needs.
If you’re seeking competitively priced car loans in Brampton, Brampton Bad Credit Car Loans offer a great mix of reasonable interest rates and loan terms. We are an auto loan company that values the customer first, and for that reason we accept any credit score, even bad credit scores. We negotiate for the best possible rates on your behalf, and won’t be happy until you are! Contact us today to learn how you set up an auto loan. It’s as easy at 1-2-3.