About 7 years ago, I left my home country and after my first month in Montreal, I bought a car with a car loan. I made ONE big mistake and it was bad enough for me to be banned from the bank… Since then, I’ve worked in the car dealership business for several years, and today I’m the co-founder of CarInspect, the #1 used car buyer support company. Let me explain how to buy a car with a car loan when you’re an immigrant, and how to avoid losing a LOT of money!
Financing options in Canada
On the Internet, at car dealerships and among friends, the most common term used is “car loan”. But there are many different types of financing, and it pays to be familiar with all of them.
1st chance - 6.99%
The “1st chance at credit” is bank financing. This traditional financing is offered by major banking institutions such as Desjardins, and offers the best loan rates. Dealers generally offer you the option of arranging your loan to make your life easier. No F&I Manager (=Finance & Insurance Manager=title of dealership finance broker) is not free of charge. The broker will look for the best financing rate for you, by contacting their banking partners. Once they’ve got the bank’s rate, they’ll add a ” percentage point ” or two, i.e., 1 or 2% interest, to the rate offered by the bank. This is the dealer’s mark-up. You are only quoted the final rate. Even so, it’s not that simple for the F&I Manager. Based on your credit history, they have to determine which lender is most likely to approve you for the best possible rate.
Example: Institution A offers better rates than institution B, which offers better rates than institution C. If you apply for financing from institution A and they turn you down, then institution B will also turn you down because you were recently turned down by another lender. Your last option is to borrow from institution C. In this case, the F&I Manager should have applied to institution B from the very beginning, because he knew you weren’t qualified for institution A.
2nd and 3rd chances - from 12.99% to +30%
The 2nd and 3rd chance loans are terms that designate non-traditional loans offered by non-traditional institutions. In other words, they’re not offered by banks like Desjardins, but rather by private companies. In general, the rates are very high, and I’d recommend avoiding this type of financing unless you absolutely need a loan, in which case this is an alternative you might consider. If you have a low credit score (less than 560 points), or little or no credit history (which is often the case as a new immigrant) then 2nd and 3rd chance financing is your only loan option. This type of financing is also an excellent way to boost your credit rating. With bi-monthly or monthly payments, you can quickly build up a credit history. The problem? Interest rates can be as high as 32% with certain unscrupulous merchants. More on how to get a 12.99% rate (good rate) with 2nd chance loan later.
Palme d’or for this advertisement! “99.9% approved” and a charming woman, which makes you forget that we’re talking about a financial product that can lead to personal bankruptcies…
Other financing options
I used to work in a used car dealership on Saint-Michel Boulevard in Montreal, and our (sad) specialty? The “in-house financing”. In other words, we offered a long-term lease, with the final payment giving you ownership of the vehicle. In theory, it’s illegal, but in practice, many merchants display it prominently on their storefronts. After all, the bigger the better, right?
A story from a former seller: If you’re offered in-house financing, you’ll only have one key to the car. The seller will tell you that the 2nd key has been lost… In reality, the seller keeps a key and installs a GPS transmitter under the car. Interest rates can exceed 100%, because there are no regulations, and as soon as the 1st payment is missed, the seller will repossess your, or rather their car. And yes, in the eyes of the law, he’s the sole owner of the car, and you’re just the lessee. The day I realized this, I quit my job immediately. It’s theft and unfortunately, the OPC and small claims are overwhelmed by the volume of complaints…
There are also micro consumer loans, generally up to $5,000, sometimes more. The vast majority are unconditional. At first glance, this seems attractive! But as you might have guessed, the flipside is an interest rate that would make you envious even of a 3rd chance loan.
What car financing options are available to newcomers?
1st chance?
This rate is only available at car dealerships and is geared towards people with a very good credit rating and, above all, a Canadian credit history. In other words, it’s impossible for a new immigrant to obtain this rate for at least 2 years in the country. Don’t panic, there are other options 😉
2nd and 3rd chance?
Now that we’ve looked at the different financing options, let’s move on to comparing loans for cars on sale for $4,000, $10,000 and $18,000. Interest rates vary according to the rate and term of the loan. The loan term should NEVER exceed 3 years. Why? Because after 3 years, interest fees can exceed the selling price of the vehicle. And, after 3 years, you’ll be faced with repair and maintenance costs, and you may sooner or later want to change your car.
Car sold for $4,000 that you finance with no down payment.
2nd chance (12.99%): payment of $66.88 every two weeks for 3 years. $815 interest.
3rd chance (22.99%): payment of $75.99 every two weeks for 3 years. $1,471 interest.
Car sold for $10,000 that you finance with no down payment.
2nd chance (12.99%): payment of $167.19 every two weeks for 3 years. $2,037 interest.
3rd chance (22.99%): payment of $189.98 every two weeks for 3 years. $3,678 interest.
Car sold for $18,000 that you finance with no down payment.
2nd chance (12.99%): payment of $300.95 every two weeks for 3 years. $3,668 interest.
3rd chance (22.99%): payment of $341.97 every two weeks for 3 years. $6,621 interest.
An example of 5-year financing?
Car sold for $18,000 that you finance with no down payment.
3rd chance (22.99%): payment of $247.24 every two weeks for 3 years. $11,668 interest.
If the lower payments seem more attractive, be wary: extending payments over a longer period means much higher interest charges.
How do you choose the right financing?
First, you need to determine what you’re looking for, what you’re going to use it for, and what your budget is. The car payment is just one expense among many, you have to factor in maintenance costs, car insurance, registration, warranties, and parking tickets (that’s a local joke, and not very funny!).
Car financing for amounts under $5,000
- Line of credit. If you have a credit card, contact your bank and ask for a line of credit. You can repay the line of credit whenever you like, as long as you pay the minimum amount (a few dozen dollars a month) to avoid interest charges. If you do this, you won’t incur any interest fees, so it’s by far the best option.
- If not, try a 2nd or 3rd chance loan.
Car financing for vehicles between $5,000 and $10,000
- Prioritize 2nd chance loans if possible.
- Otherwise, I would suggest making a downpayment so that the loan does not exceed $5,000.
- Reconsider your needs. A “beater” is an old car that’s not very expensive and can get you from point A to point B while you build up a credit history.
Financing for amounts over $15,000
- 1st or 2nd chance loans or nothing.
How did a bad choice destroy my credit rating?
When I first arrived, I bought a “beater” for $1,800: a Honda Civic with 2005, 180,000 km on the odometer. I was soon tempted to get a loan to buy a nicer, newer, bigger car…
Lo and behold, I found myself buying a 2012 Jeep Patriot a few months later. I managed to pay the financing, but when the transmission broke, that was another story! It cost me $5,000 to repair, and the vehicle was unsellable without repairs, plus I needed a car to get to work. How was I going to pay for the repairs? How would I find a new car to drive to work? I ultimately lost everything, right down to my credit card and my credit rating fell below 300. It took me 3 years of being absolutely perfect to straighten out my credit rating.
Conclusion
Don’t rely on salespeople or finance brokers. The ease with which you can obtain a bank loan often makes you forget how dangerous it can be.
