Financing is often the most convenient way to pay for a new or used vehicle — but borrowing money to buy a vehicle comes with risks attached. OMVIC, Ontario’s vehicle sales regulator, recommends that consumers do their homework so that they can make an informed decision on finance deals.
“My number one tip is to make sure you read and understand your vehicle purchase contract (bill of sale) and your finance agreement before you sign it,” says Tim Hines, Director of Consumer Support at OMVIC. “That begins with an initial disclosure statement for financing, which is often written up on the vehicle’s bill of sale. That initial disclosure statement is important, because it helps consumers understand things like the interest rate and the annual percentage rate (APR). The APR can be higher than the interest rate if there is a fee associated with setting up the financing.”
Knowing the APR of a particular loan provides a like-for-like comparison with other deals on offer, either from your own financial institution or at the dealership. Dealers may be able to shop around to different lenders, or access lower-rate financing from the vehicle manufacturer, but keep in mind that making multiple loan applications can adversely affect your credit score. If you don’t want this to happen, ensure it’s written into the vehicle contract as a condition of sale. Typically, dealers receive a commission for arranging a loan. The law in Ontario says that this too must be indicated on the bill of sale.
It’s also important to consider the total cost of the car or truck once you combine the price of the vehicle with the cost of financing. That will depend not only on the APR but also the terms of the loan: borrowing over a longer term might bring down the monthly payment amount but could increase the overall cost of the vehicle.
“Someone might buy a $30,000 car and finance it for eight years at a high interest rate,” says Hines. “What they don’t realize is that the $30,000 car has become a $54,000 car by the time they’ve done paying for it. It sounds crazy, but we see it all the time. People get caught off guard because they don’t understand how to go through the agreement. Most of us don’t review contracts every day or know what to look for.”
Basing your choice of financing solely on the monthly payment amount may also lead to problems in the future with negative equity. Our companion article has more on the risks of negative equity.
No. Two vehicle purchases are identical. Each buyer has individual circumstances – income, monthly outgoings, credit history and comfort with risk, for example, as well as their plans for the vehicle they’re buying – that will affect the finance options for which they are eligible and the best course to take.
OMVIC recommends that vehicle buyers obtain their credit score upfront from an agency like Equifax or TransUnion Canada before shopping for loans, and ensure that the personal details on a finance application are correct. It’s illegal to submit false information, so ask to review the application before it’s submitted.
If you’re struggling to understand the implications of the finance you’ve been offered, OMVIC’s Consumer Support Team is here to help. A common question for the team is whether you must accept the different finance terms to those indicated on the bill of sale, if the dealer is unable to obtain the financing that was originally discussed.
“Maybe you discussed a 5% interest rate with the dealer, who bases an estimated payment on that figure,” offers Taylor Dickson, OMVIC’s consumer support manager, by way of example. “Those numbers are then written on your bill of sale. But when the finance application is submitted and approval comes back from the lender, you’re only approved for 7%, not 5%. You do not have to accept that higher interest rate. If you agreed to a certain rate, and the dealer is unable to fulfill the terms of that agreement, then you have the option to renegotiate, or to walk away.”
The above scenario is one reason why it’s much better to ask questions and seek advice before you sign a finance agreement, not after. The customer can no longer walk away from the deal if they go ahead and sign the finance agreement, which comes after the finance application and is separate to the bill of sale. There’s no cooling-off period once you’ve put pen to paper and you’ll be locked into the higher rate. While the bank or finance company may agree to cancel the loan, the dealer is under no obligation to return the funds, committing you to the agreed payments.
It also illustrates the importance of including the discussed finance details in the bill of sale, as conditions of the sale. Franchise dealers may do this more easily than an independent used car dealer. “If the dealer refuses to put them in the contract,” adds Dickson, “or refuses to discuss their usual lenders or rates, it’s probably not a good sign. You may want to think twice about the purchase.”
During this busy car-buying season, visit OMVIC to access free car-buying resources to get you started and sign up for the quarterly newsletter, Consumer Line.
Contact OMVIC’s Consumer Support Team at firstname.lastname@example.org or 1-800-943-6002 for expert advice and answers to all your car buying questions.
To see if you are eligible to receive financial assistance from the Compensation Fund, contact OMVIC at 1-800-943-6002 or email email@example.com.