There is an innate sense of freedom when you are driving your car. Unlike taking public transport, you can go wherever you want, whenever you want. As recent world events have made cars more of a necessity rather than a luxury, car prices continue to rise.
Back in 2018, the price of an average car in Canada was around CAD 38,000. This price rose to CAD 40,000 around 2019. After the CAD 40,000 mark was breached, car prices continued to climb until they reached the current average price of CAD 45,000. With car prices skyrocketing, people have forgone the idea of saving for a car. Instead, most Canadians rely on auto financing solutions to buy a car.
Financing helps people afford a car, but at the end of the day, they still need to pay a little over CAD 45,000 to fully own the car that they drive. This is why many Canadians are starting to consider buying used cars via financing. This is why the topic for today’s article revolves around determining which is better for you: financing a new car or a pre-owned one.
New Car Loans
According to studies, Canada’s new car sales reached 1.5 million in 2020. This proves that buying new cars remains a strong choice for car buyers in the country.
Despite being a popular choice, the fact remains that it might not be the best choice for you. Knowing the advantages and disadvantages of new car loans can help you arrive at a more informed decision.
New Car Loan Advantages
The automotive industry makes it alluring to buy a new car. Interest rates are often subsidized. That is why there are cases that the rates are typically lower than the posted bank rates. This allows you to pay less money and save some money along the way too.
It is important to note, however, that most new car loans expect you to have a good credit score. Since the lenders will lend you more money to buy a new car, they would want to make sure that you will be able to pay your dues on time. Although you can access bad credit car loans, there are a few hurdles you have to face first.
Interestingly, new car loans can help improve your credit score. Your score may take a dip when you first take on a loan. But if you pay on time, then your credit score is bound to improve.
New Car Loan Drawbacks
It is easy to get caught in the losing end of car financing, particularly with a new car. If you do not pay off the loan on a new car within two to three years, you will usually still be underwater on your loan.
Have you ever heard the term ‘upside-down in your car’? It means that you owe more on your car loan than your car is worth. If you cannot pay your dues on time, going upside-down is an inevitability.
Unless you are able to put several thousand dollars down as a down payment on your new car, it can be a dangerous position to be in. If your new car is written off, the bank will consider you to be liable for the full amount of the loan. This can be prevented by purchasing GAP insurance.
Used Car Loans
Pre-owned car retail sales have started to pick up once again in Canada. From the -1.3 percent retail sales in 2019, it jumped to 11.5 percent in 2020. This number continues to grow, resulting in around CAD 1.05 billion car sales in January of 2021.
Again, although the number of people buying used cars is increasing, it does not mean that their circumstances are similar to yours. It is still better to explore the pros and cons of purchasing a used car through financing.
Used Car Loan Advantages
One of the best advantages that used car loans have over new cars is the price. While the average cost of a new car is around CAD 45,000, used cars typically retail for around CAD 25,000.
Similar to new car loans, bad credit car financing is also possible for used car loans. But unlike new car loans, loans on pre-owned vehicles can have terms as long as four years or longer.
Lastly, since a vehicle’s value depreciates, used car buyers can be in a positive equity situation in a matter of months. This is different from new car buyers who would have to wait for years before they see positive equity on their car loan.
Used Car Loan Drawbacks
The car’s condition is not an issue for new cars. It is, however, the primary concern for used car sales. That is why if you decide to choose a used car loan, always go through a reputable dealership. Avoid ‘Buy Here Pay Here’ locations, which do not report to the credit bureaus, therefore not meaning your credit score will benefit from your monthly loan payments.
Fortunately, most car manufacturers now offer special financing rates on certified pre-owned vehicles. This ensures that you are getting better quality cars than most pre-owned vehicles. But, they may be higher priced than other dealerships.
Lastly, since most used car dealerships offer some form of financing solutions, it is easy to give in to convenience and sign a contract with the first loan offered to you. However, the first deal may not necessarily be the best deal. That is why it is best to shop for a lending company that offers low interest rates and reasonable terms.
New Car Loan vs. Used Car Loan: Which One Is for You?
It is important to reiterate that if a used car loan worked for someone you know, it might not be the best for you—and vice versa. Deciding which car loan to take ultimately depends on your particular situation.
Here are some of the things you need to consider when determining the right loan for you.
- Your budget
- Your sources of income
- Your existing loans and expenses
- Your credit score
- When you plan to switch cars
- Interest rates presented
- Loan terms offered
- Down payments required
Both new and used car loans are efficient financing solutions for getting you where you need to be. But, before you sign any auto financing contract, it is best that you weigh both options carefully. When you do your research, check your current financial status, and shop for reputable lenders and dealers, then you are bound to choose the financing solution that best suits you.
Get Approved Canada is one of the country’s premier loan specialists. For years, we have been offering top-notch auto financing services that have helped thousands of Canadians get the car of their dreams with low to zero interest rates and reasonable contract terms. Get pre-qualified today!