PERSONAL & AUTO LOANS INFORMATION                                                                                 



Many types of loans are available. Read the information below to learn about your specific borrowing needs and the loan option best for you.


Automobile Loans are the most common type of debt. The following will help you make more informed decisions…..
  • Calculate what you can afford after your vehicle trade-in to avoid a cash flow problem you’ll regret later on.
  • Consider a used vehicle as a viable option. There are good used products coming off lease or dealer demos still under warranty. Note that if you plan to drive a used vehicle after the warranty expires, repair costs may be high. If this option works for you, research the vehicle’s current market price and repair history before purchasing.
  • Get loan pre-approval to improve your bargaining power with the dealer.
Lease vs. Buy

Typically, leasing is the better option if you want a new car every two to three years with significantly lower monthly payments. However, if you purchase the vehicle at lease end and continue to drive it, your ongoing costs will usually be higher than had you originally purchased it. Check out the benefits and drawbacks for each option below. Then, go to the lease/loan calculator to determine which option better suits your budget.

 
Purchase
Lease
     
Benefits
  • Ownership equity
  • Fixed monthly payments
  • Unlimited mileage
  • Warrantees
  • Resale value
  • Lower monthly payments for a 2-3 year lease.
  • New vehicle options every 2 or 3 years
  • Drive a vehicle you could not afford
  • No trade-in price haggling
  • Purchase option at lease end
  • Drawbacks  
  • Higher monthly payments versus
        leasing for initial 2 – 3 year period
  • Repair costs after warranty expires
  • Trade-in price haggling
  • Early lease termination very costly
  • Mileage restrictions (overuse penalties)
  • No ownership equity (not a net worth asset)
  • Higher insurance costs if leased car is more expensive
  • More expensive if vehicle purchased at lease end.


  • Leasing Overview

    If leasing over a two or three year term, price is the most important factor in determining your monthly payments. Dealers have a factory invoice price to which they add their margin to arrive at the Manufacturer's Suggested Retail Price (MSRP). The difference between the two is your bargaining space. Margins may be as small as 4% or as much as 16%, or more. Dealers will always negotiate leases. Therefore, ensure you know the factory invoice price so you can negotiate from the invoice price up, not from MSRP down. Additional rebates, factory-to-dealer incentives, trade-in credit, or a cash down payment can reduce the lease price. At lease end, you typically have the following options: extend the lease, return your vehicle, purchase it outright or trade it in for a new lease.

    Lease contracts are more complex than a purchase agreement. Here are a few important leasing guidelines to consider...
    • Investigate financing alternatives. There are often better deals at your financial institution compared to a dealer’s finance company.
    • The lease term should not exceed the vehicle’s general coverage warranty. Longer term leases that reduce your monthly payments may result in early termination penalties and costly repairs.
    • Ensure the lease is close-ended (vs. open) and that it includes a purchase option. This is because if the vehicle is worth more than the estimated residual at lease end, you may purchase it and keep driving or sell it for a profit.
    • Get gap insurance. This pays the difference between what you owe on your lease and it’s actual worth if stolen or destroyed.
    • Factor in potential fees such as early termination, disposition, excess mileage etc.
    • Choose vehicles whose estimated 24 or 36 month residual values are at least 50% of the original MSRP (although the actual value may be higher or lower). Residual value is the wholesale worth of a car at lease end, after depreciation. Generally speaking, high-residual models have more market demand and incur less depreciation than others. A higher residual also lowers your monthly lease payments.
    • Don't sign anything until you've finalized the deal
    Other Loans Options

    Your ability to be approved for a loan or receive a preferred interest rate is influenced by your credit history. Organizations such as Equifax Canada and Trans-Union Canada compile your credit history and, based on a formula, calculate a 'credit score'. The credit score is used by financial institutions to determine your credit worthiness. You can obtain a copy of your credit history by contacting either Equifax Canada 1-800-465-7166; consumer.relations@equifax.com or Trans-Union Canada 1-800-663-9980; marketing@tuc.ca.

    Personal loans
    typically have a 1 to 5 year term and may be used for debt consolidation, home renovation, RRSP contributions etc. You have the option of a fixed interest rate with a fixed monthly payment or a variable rate (also with fixed monthly principal and interest payments) that fluctuates with Prime. Variable rate loans are a better choice when interest rates are declining because your loan will be paid off faster. Personal loans may be paid off anytime without penalty.


    A Personal Line of Credit (LOC) is an unsecured (i.e. no collateral required) amount of credit, usually up to a $50,000 limit for any purpose such as business needs, RRSP top ups or carry forward contributions, renovations, etc. Interest rates are generally tied to Prime and you only pay interest on the capital used. For example, if your limit is $50,000 and you withdraw $10,000, you only pay interest on the $10,000. The remaining $40,000 is still available for use. This is a revolving line of credit in that you may withdraw capital and replenish it back up to your approved limit without penalty (similar to a credit card).

    Any outstanding balance may be repaid in part or in full at any time without penalty. Your money can be accessed via cheques, online banking and cash withdrawals.

    It is financially prudent to protect yourself with credit insurance on your outstanding balance. You only pay for the amount of insurance you need, based on your average daily Line of Credit balance. If there's no balance, there's no charge. For example, if your loan limit is $100,000 and you have used up $40,000, you pay insurance costs only on the $40,000.

    A Home Equity Line of Credit (HELOC) is similar to a personal line of credit (see above) but provides more security for the lender because your home equity is used as collateral. Effective July 9, 2012, HELOCs can provide up to 65% of a home’s appraised value minus any mortgage loan balance. For example, if your net equity is $300,000, you may be eligible for a line up to $195,000.

    HELOC interest rates are variable and based on Prime. Since the line is secured, your monthly payment can be as low as interest only. If rates are rising, you may convert all or any portion of your unused line to a fixed mortgage rate at any time. If you convert a part of the loan to a fixed rate (and leave the remainder as a revolving loan), you may:

    i) make a 15% annual prepayment against the capital or increase the payment amount up to 100% for the fixed rate portion and

    ii) pay off the revolving balance at any time without penalty.

    If rates fall and you decide to prepay and refinance your entire fixed portion, you will be penalized with an additional payment of the greater of three months' interest or an Interest Rate Differential (IRD) amount.


    When choosing a HELOC, ensure you have the option to convert to a fixed rate loan when interest rates are low and that there are no restrictions on principal re-payments.
    HELOC’s involve fees to register the property as security and/or appraise it. Also, in a personal bankruptcy, while unsecured debts are wiped out, any mortgage payments (including HELOC loans) are not.

    On the downside, HELOC’s involve fees to register the property as security and/or appraise it. Also, in a personal bankruptcy, while unsecured debts are wiped out, any mortgage payments (including HELOC loans) are not. Finally, a creditor lien on your house is not appealing for many individuals.

    Finally, protect yourself with credit insurance on your outstanding HELOC balance. You only pay for the amount of insurance needed based on your average daily Line of Credit balance. If there's no balance, there's no charge. For example, if your line limit is $200,000 and you have spent $90,000, you pay insurance costs only on the $90,000.

    Student loans help fund education costs. However, your best education savings strategy is to open a tax-sheltered Registered Education Savings Plan (RESP) as soon as possible. Annual contributions plus the Government grant of $500 will generate sufficient tax free savings to cover most, if not all post secondary education costs. Another advantage is that your child would be free of any loan debts after graduation. For your specific cost projection and RESP information, go to Education Funding.

    For students who meet certain criteria, the next ‘funding’ step is to apply for any available federal, provincial and school grants. Should a student loan still be necessary, payment is only required on the monthly interest charges until six months after leaving school. The loan must then be converted to a fixed or variable rate personal loan and discharged within seven years. If the student defaults, his/her information will be forwarded to credit bureaus and the credit rating will be adversely affected. Outstanding loans may be paid off at any time without penalty.

    Financial institutions may also offer a revolving line of credit to full time, qualified students up to $8,000 yearly for four years. Students pay interest each month only on what is used. Similar to a personal line of credit, any capital withdrawal may be replenished back up to the maximum $8,000 limit without penalty. After leaving school, students must pay the greater of $50 or 1% of the outstanding balance on a monthly basis.

     

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