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Cash, Credit, Leasing
Cash
The most economical way for you to pay for your new car would be to use money you already have on hand--unless the rate of return it's earning is higher than the cost of borrowing the money.
Most people find it either impractical or impossible to come up with the entire amount of money it takes to buy a vehicle. Even if you do have enough money to cover the purchase, you might be better off using it in other ways.
Credit
There are many options to choose from when looking into ways of financing your car with credit. Be sure to examine each carefully to find the one best suited to your personal needs.
Here are brief explanations of the credit options available to most car buyers:
- Pre-approved Car Loans
With a pre-approved car loan, your lender approves the amount you can borrow before you start shopping for your car. That way, you know exactly how much you can spend on a car and what your maximum monthly loan payment will be.
Pre-approved car loans are available at most Canadian financial institutions.
- Car Loans
If you decide to finance your new car with a car loan, you can select either a fixed or variable interest rate.
- A fixed-rate loan gives you the security of knowing exactly what your interest rate and monthly payments will be during the loan term you select.
- A variable-rate loan gives you the convenience of fixed payments and the potential to pay more or less interest, according to current rate fluctuations. If interest rates go down, you benefit; if rates rise, you can choose to increase your monthly payments or extend the term of your loan.
You will probably find the fixed interest rate offered by most financial institutions to be slightly higher than the variable rate on the same loan: this is because a fixed rate provides the borrower with security against rate fluctuations.
Many financial institutions give car-loan customers the option of switching from a variable rate to a fixed rate, or vice versa, without penalty.
Whether you choose a fixed or variable rate, your total monthly payment will be based on the principal amount of the loan plus interest charges for the term you select.
Ordinary car loans are available at most Canadian financial institutions.
- Dealer Financing
Car dealers offer financing in affiliation with various financial institutions and car manufacturers. When you shop for a car, ask for details about financing plans from the dealerships you visit.
Leasing
The lower monthly payments associated with leasing a car have resulted in its increased popularity during the last decade of rising car costs.
With leasing, monthly payments are based on the difference between the car's initial price and its expected residual value at the end of the lease term.
The leasing company retains ownership of the car while you are leasing it; however, you are responsible for all maintenance and repairs during the term of your lease.
There are two types of leases:
- Closed-end Lease
With a closed-end lease, the leasing company is responsible for the residual value of the vehicle at lease-end. You can choose to buy the car for that price, plus any other charges or fees stipulated in the lease, or return it to the leasing company.
- Open-end Lease
If you have an open-end lease, you are responsible for the residual value of the vehicle. At lease-end, you are obliged to pay that amount to the leasing company together with any other charges or fees stipulated in the lease.
Despite the attractive low monthly payments associated with leasing, it may not be for everyone. If you choose to lease, make sure you read the fine print and understand all the costs and restrictions involved. For example, you will probably have to give a down payment as well as a security deposit, making leasing more costly than you anticipated.
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