Financing a car is one of the biggest financial decisions most Canadians make. Unfortunately, it's also where many people make costly mistakes that can cost thousands of dollars over the life of the loan. Whether you're buying your first car or your fifth, understanding these common pitfalls can help you secure better terms and save money.
1. Not Checking Your Credit Score First
Many Canadians apply for car loans without knowing their credit score. This can lead to surprises and missed opportunities for better rates. Check your credit score before applying so you know what to expect and can address any errors.
2. Focusing Only on Monthly Payments
Dealers often ask 'what monthly payment can you afford?' This tactic can lead to longer loan terms and higher total costs. Always consider the total loan amount, interest rate, and term length—not just the monthly payment.
3. Not Getting Pre-Approved
Shopping for a car without pre-approval puts you at a disadvantage. Pre-approval gives you a clear budget, strengthens your negotiating position, and speeds up the buying process.
4. Accepting the First Offer
The first financing offer you receive may not be the best. Shop around and compare rates from banks, credit unions, and specialized lenders. Even a 1% difference in interest rate can save thousands over the loan term.
5. Ignoring the Total Cost
A lower monthly payment might seem attractive, but extending your loan term means paying more interest overall. Calculate the total cost of the loan, including all interest charges, before committing.
6. Skipping the Fine Print
Loan agreements contain important details about prepayment penalties, late fees, and other charges. Read the entire contract carefully and ask questions about anything you don't understand.
7. Overextending Your Budget
A common rule is to keep your car payment under 15-20% of your monthly take-home pay. Don't forget to budget for insurance, gas, maintenance, and repairs when calculating what you can truly afford.
8. Not Considering Total Ownership Costs
Beyond the loan payment, factor in insurance (which can be higher for financed vehicles), fuel costs, maintenance, and potential repairs. Some vehicles cost significantly more to own than others.
9. Trading In a Car with Negative Equity
If you owe more than your current car is worth, rolling that negative equity into a new loan increases your debt and can trap you in a cycle of owing more than your vehicle's value.
10. Not Negotiating the Purchase Price
Many buyers focus on financing terms but forget to negotiate the vehicle's price. Always negotiate the purchase price first, separately from financing discussions.
What You Should Do Instead
- •Get pre-approved before shopping to know your budget and strengthen your negotiating position
- •Compare multiple financing offers from banks, credit unions, and specialized lenders
- •Focus on the total cost of the loan, not just monthly payments
- •Read all loan documents carefully and ask questions about anything unclear
- •Keep your car payment under 15-20% of your monthly take-home pay
- •Consider the total cost of ownership, including insurance, fuel, and maintenance