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When shopping for a car loan, you have two options: go through the dealership or find your own financing through a bank or credit union.
Jessica Moorhouse, an accredited financial counsellor and host of the More Money Podcast, says both have advantages and disadvantages. If you have good credit, you could take advantage of promotional zero per cent financing through the dealer, which can save you some money. (According to Statistics Canada, the average interest rate on a car loan in Canada is 6.15 per cent.)
But low, promotional interest rate offers are typically reserved for new cars. According to Moorhouse, dealers can be less flexible with loan options and terms and almost always require a sizable down payment.
Other times, the interest cost is built into the price you pay for the car. “Let’s say you buy a car with zero per cent financing, the purchase price might be $40,000,” says Jason Heath, certified financial planner at Objective Financial Partners. “Whereas if you were to negotiate with the dealer using your own cash, savings or another source of financing, the purchase price might be $37,000 or something.”
There’s also the risk of yo-yo financing scams at car dealerships. It happens when the dealer lets you take a vehicle off the lot before you’ve actually signed the financing agreement. This means the dealership can call you back to say your financing has fallen through and pressure you into signing a new agreement, one that requires you to pay a bigger down payment and higher interest rates and fees.
Banks and credit unions are worth looking into if you have good credit but don’t have the money to pay for a vehicle upfront. If you’re an existing bank customer, you may be able to get certain discounts.
Because interest rates will vary depending on several factors, like your credit score and location, Moorhouse says your best bet is to shop around for a car loan to ensure you’re getting the most affordable financing terms. This will help you determine who can give you the best rate and terms: the dealer or the bank.
Heath agrees, noting that you should negotiate the purchase price with the car dealership on the assumption that you’re using their financing. “You might be able to negotiate a lower purchase price for the vehicle, even though your interest rate for your own financing might be higher than what the dealership is offering you.”
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