Would you pay 20% interest on a car loan? How vulnerable car buyers fall prey to shady lenders

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Godfrey Mungeni now drives to work in a used 2017 Kia Sorrento he bought at a high price: his car loan carries a 20% interest rate.

Mungeni, a new permanent resident, works in the construction industry and needed a car to simplify his commute to jobs in Guelph and Innisfil, places far from his Scarborough home. Unfortunately, as an immigrant from Zimbabwe, he did not have a good credit rating here in Canada, which made it difficult to obtain a car loan.

“I started looking for a car last year, but it was difficult to find something during the pandemic,” Mungeni said. “I went to a few dealerships and some sales people told me my credit rating was too low; others were not interested because I was an asylum seeker at the time.

Last month, he got in touch with a dealership salesperson who had previously worked for a bank and understood the ins and outs of the loan application process. He helped Mungeni, who was accepted for a loan through TD Canada Trust at 20% interest over 72 months for a used vehicle that cost $ 18,000, including a down payment of $ 1,000. Used car loans carry higher interest rates than new car loans, and a 20% interest is not unusual for someone with poor credit. Goal, but over time Mungeni’s monthly payment of $ 500 is much more than the purchase price of the car.

“I was hoping for a better rate, but when you’re desperate and really need something, you go for what’s right in front of your eyes,” Mungeni said.

If Mungeni had spoken to Ryan Peterson before purchasing his car, he might have tried a few other alternatives before agreeing to his current loan rate. Peterson, director of auto services for CAA South Central Ontario (CAASCO), strongly believes that potential buyers should come to dealerships armed with an understanding of the benchmark interest rate on auto loans.

“Call one of the Big Six banks and find out the going rate,” Peterson said. “It’s usually a happy medium, so anything below that rate is a good deal. Then take the tour. Dealers often have several options, but you may need to ask. If your loan is funded in advance, the dealer may also be able to offset these costs by lowering the purchase price.

“A lot of vendors prey on vulnerable people. People turn to subprime lenders if they are not eligible for a bank loan and things can get very shady very quickly. If you can’t qualify for a quality loan, qualify. Borrow a down payment from family or friends to get a better rate, or get a co-signer with a good credit score. In this way, the risk for the bank is less. Exhaust all possible routes first as it can be very costly otherwise. “

Karim Nanji, CEO of Marble Financial, the creators of an online financial wellness platform, explains that lenders are concerned about the financial risk you present to them. will get. If you have to go to another lender other than a large bank, the loan will not be as cheap.

“Be very careful,” Nanji said. “Know your credit rating before you buy a car and know your budget so dealerships can’t sell you more. If a finance offer is too high, you can address negative items in your credit rating before you buy.

“Anything over 59.9% interest on a loan is above the criminal threshold. The lender also has the obligation to disclose all the conditions and to detail them: the interest rate, the total cost over the term of the loan and any administrative costs included. Pay attention to these. Always read the fine print, because that’s what gets people in trouble. Unfortunately, many car buyers only worry about the monthly cost of their loan, rather than the total cost of the purchase over the long term.

One of the problems with accepting a high-interest loan is that the buyer can end up with negative equity, notes Peterson of CAASCO.

“The interest rate on the loan can be so high that the car depreciates faster than you can pay off the loan. You soon owe more than the car is worth, what if it’s a lemon? You will end up repairing it over and over again, paying for repairs on top of the loan. He locks you in a corner. If you have to sell the car because you can’t afford the repairs, you’re in real trouble.

“Keep in mind that there are bad debts; do your homework.”

Mungeni knows the interest rate he is paying is high, but said the seller explained that he would be able to refinance it. “I will try to renegotiate my loan after eight months,” he said.

The problem with this approach, says Peterson, is that “banks won’t refinance a loan for more than the value of the car. You have to make it worth it.

Expensive or not, Mungeni said he was “just grateful to have a car.”

“Finding something now is a blessing after being refused so many times. Immigration comes with many challenges beyond moving to Canada. “

Here are seven ways to avoid high interest rates on auto loans:

  • Know your credit score. If it is low, correct it before applying for a loan.

  • To be informed. Consult a bank to find out the average loan rate.
  • Know the car’s Blue Book value.
  • Compare the prices. Dealers have more than one option and may provide promotional finance offers.
  • Borrow money for a larger down payment to benefit from a better interest rate.
  • Get a co-signer for your loan.
  • Understand the total cost of ownership. Read all of the fine print on the loan document and understand all of the fees that are included. Ask questions – lenders are required to disclose all costs.

Sources: CAASCO, Marble Financial


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