Did you know that in 2022 dealerships sold nearly 1.5 million new vehicles in Canada? Most of the new owners sought out car financing options before leaving the lot. 

But what do you need to finance a car in Canada? There are several requirements a car loan provider must consider. 

The following guide will explain different car financing options and how they work in Canada. Read on to learn about the loan terms and conditions that lenders present to customers buying new rides. 

Car Loan Canada 

Vehicle financing in Canada, such as a car loan, involves offering credit to a borrower that equals the vehicle’s price. The car they buy acts as collateral for their loan if they don’t make their payments. 

If the borrower stops meeting loan conditions at any time, you have the right as a lender to take the car from them. Types of lenders for auto loans include banks, credit unions, dealerships, and online lenders. 

No matter what kind of lender you are, you can decide to sell the repossessed vehicle to make your money back. 

Make sure to negotiate a fair loan for both sides including the terms, interest rates, and scheduled payments. Once a borrower pays off the principal and interest on their loan, they completely own the vehicle. 

To make sure a borrower can pay off their loan easily, consider only offering aid to pre-qualified customers based on their credit. 

Unsecured and Secured Loans 

The previously mentioned collateral-based loan is a “secured” loan. It’s secured because it’s backed by the car itself if the borrower defaults on their loan. 

Some customers find unsecured loans more attractive because they don’t want to risk losing their vehicle. However, if you issue an unsecured loan, plan to include higher interest rates. 

The higher interest rates of an unsecured loan act almost like a fee for trusting the borrower’s word. Unsecured loans are normally only offered to customers with excellent credit scores to help ensure payments get made. 

Depending on the type of loan you offer, you might want to put restrictions on the amount. If you offer an unsecured loan, you might set a lower limit based on the customer’s history of paying off debts. 

Make sure to develop a thorough car loan application to gather relevant details about potential borrowers. Keep in mind that most Canadians use unsecured personal loans, but some opt for secured options after comparing loan costs. 

Lines of Credit 

When you offer a line of credit, it’s like offering a customer a credit card. It gives them a sum of money to spend up to a specific limit. They can use as much or as little funds as they need to buy a vehicle. 

They can also pay you back and take more money from the account over and over. The interest rate is variable, but borrowers only pay interest on the money they take from the account instead of the entire amount available. 

Lines of credit offer flexibility that works well for customers who need access to money continually over a certain amount of time. 

Payday Loans 

Payday loans work well for customers who only need short-term aid, but they come with hefty fees. It’s a good way to make money as a lender, but a very expensive option for borrowers. 

You might also hear payday loans referred to as high-cost loans or high-cost credit. You can only lend up to $1,500 and borrowers have around 2 months to pay off the loan. So, this loan choice typically only works for used car sales. 

Because of the elevated interest rates, you might consider offering this type of loan without checking an applicant’s credit. Furthermore, most people seeking out payday loans do so because they don’t have great credit. 

With a payday loan, borrowers pay you a fixed fee instead of paying interest if they make payments on time. You get to decide the payday schedule for the borrower to make payments. 

When a borrower receives their paycheck, they must pay you back some or all of the loan amount. If they don’t pay you on time, you can add more fees and interest charges. 

Lender Checklist 

A car loan provider usually needs to check credit history more than mortgage lenders. There’s even a specific Auto FICO score to help decide an applicant’s eligibility for different car loans. 

Lenders must also look at an applicant’s current employment and income to make sure they have stability. To do this, ask applicants to provide a recent paystub or bank statement, or use a payment verification system. 

Always consider the loan-to-value ratio of the car an applicant wants to buy. For example, a higher down payment lowers the ratio and you don’t need to lend as much money. 

Make sure to incorporate payment priorities into your application process. For example, if an applicant also has student loans, you need to know which they would pay first if they only had the funds for one. 

Finally, always check debt to income and payment to income factors. Debt to income involves how much applicants owe for other loans and things like rent compared to their monthly income. 

Payment to income involves monthly payments for the specific auto loan they’re applying for compared to their monthly income. A checklist protects you as a lender and protects the borrower from getting in over their head. 

Car Financing in Canada 

Now you know how a car loan and other financing options work in Canada, and what options work best for different applicants. You also know what questions to ask applicants before offering a loan to protect both parties. 

If you need help finding the perfect applicants, book a demo with one of our specialists. We combine tailored lead generation with AI financial wellness technology. 

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