Car loans: How do they work?
May 01 2023,
How does car financing work? Is it better to lease or buy a car? When shopping for a vehicle, it is normal to wonder about financing; after all, the monthly payments will be coming out of your pockets! This means that understanding the mechanisms of the financing process is a wise decision, especially since it can have some influence on your payments or even on your interest rate!
Your Cadillac dealership in Laval, close to the West Island, downtown Montreal and Blainville, tells you more about Cadillac financing and all that it entails!
How does auto financing work?
Instead of paying for the vehicle’s full amount at the time of purchase, the buyer applies for a loan with a financial institution or the dealership itself. Then comes a credit inquiry, which will not only determine if the loan will be accepted or not, but also specifies the agreed interest rate.
Then the reimbursement terms are established, which include the duration of the contract along with the amount of the monthly payments.
To place a request for a car loan, you will have to fill in a credit application and provide your financial information, such as your bank statements and pay slips, so that the financial institution can have a general idea of your credit score and file, and be able to evaluate your capacity to reimburse the loan.
Once the loan is fully reimbursed, you become the owner of your vehicle. However, if you do not reimburse the loan according to the terms established in the contract, the lender can repossess the vehicle for resale, as a means to regain financial losses.
This is why it is important to properly understand the terms established in your loan contract and to ensure that you can afford the monthly payments, before you sign a vehicle payment plan or agreement.
How can you finance a car in 3rd chance credit?
3rd Chance credit is a financing plan established for buyers who have already gotten a 2nd chance loan, but whose financial situation remains problematic, whether it is due to late payments or a debt ratio that is too high, for example.
Interest rates are much higher for a 3rd chance loan, but if your payments are on time and made at the pre-established dates, in many cases, it is possible to sign a new loan agreement after a period of 18 or 24 months, and get a better rate.
Take note that 3rd chance credit is offered on used vehicles that meet certain standards only (model year, mileage, etc.)
For more information, please contact our financing department.
How do taxes apply on a car loan?
Taxes on a car loan only apply to the amount that is being financed in order to complete the vehicle purchase and not on the total cost of the vehicle itself.
If, for example, you purchase a new vehicle for $ 30,000 and you decide to finance $ 25,000, then taxes (TPS and TVQ) only apply to the $ 25,000.
Take note that you will have to pay TPS and TVQ both on new or used models when purchased through a vehicle dealer; rules and regulations regarding private purchases and sales of a vehicle between two individuals are slightly different. In this case, you will only have to pay the TVQ.
Amongst the other taxes and fees to plan for, there is a 3 $ duty on new tires (per tire), plus taxes, in the case where the vehicle is equipped with new tires or if you are purchasing a second set of tires (like winter tires, for example).
How can you end a car loan agreement?
There are several reasons to want to end a car loan agreement; here are just a few.
The Consumer Protection Bureau (L’office de la protection du consommateur) specifies that “once you have signed the financing contract, you have 2 days to cancel it, providing that you have not taken possession of the vehicle. This period begins when both you and the merchant are in possession of a copy of the contract.”
Should you change your mind after this period, you should know that the dealership could request a penalty, which cannot be higher than: $ 400 or 2 % of the price of the vehicle.
Do you wish to put an end to a financing contract by reimbursing the remainder of the balance? If you have the necessary funds, you can reimburse the balance left on your car loan in a single payment. This will allow you to put an end to the financing agreement and recover the ownership of your vehicle. Since almost all car financing loans are what we refer to as “open loans” –contrary to a mortgage, for example-, should you reimburse the loan before the end of the contract, there will be no penalty.
How can you modify a car loan?
It is sometimes possible to modify a car financing contract; your financial institution can present you with all of the possible options and the steps to follow in order to apply them.
You might, however, have to provide some documents, like financial statements, pay slips, tax returns, etc.
If you are happy with the established terms, you will have to sign a new financing contract to ratify the modified agreement. Make sure to read the new terms with great care before you sign the new agreement; and make sure to keep a copy!
How can you transfer a car loan?
Have you found a more advantageous rate or better financing terms in another financial institution, while you are reimbursing your current loan? It is possible to transfer it to another lender, under certain conditions.
Firstly, you must contact your current financial institution to find out the balance of your loan, the fees and conditions related to the transfer. You will then have to get a positive answer form the new lender, who will evaluate your request according to the provided information: your vehicle, the amount of the loan, your income and, of course, your credit report.
Get all of the necessary documents ready for the transfer: the vehicle sale agreement, the financing agreement, proof of car insurance and registration.
Finally, pay for the transfer fees so that the new lender can take over the loan; they will be the ones to repay the balance of the current loan to the previous lender.
How can car financing improve your credit score?
Your credit score is the reflection of your financial habits; this means that if all of your payments are done according to schedule, if you do not have late payments or unfavorable circumstances (like bankruptcy or consumer proposal) to your file and if your debt ratio is not critical, then you should have a relatively high credit score.
However, if you have a bad credit score or not credit history at all, obtaining a car loan and reimbursing it monthly can help establish credit history and, in the mid to long term, improve your credit score. It can also show current or future creditors that you are trustworthy and capable of repaying your loans.
Moreover, try not to incur further useless debts that could have a negative impact on your credit score.
Our financial experts at Cadillac Laval, close to the West Island, Blainville and Montreal, can answer all of your questions regarding car financing. They can also help you not only find the Cadillac Canada vehicle that will best suit your needs and budget, but also the perfect financing plan.
While you’re here, get more information regarding our current Cadillac special offers and promotions in Laval!
