November 07 2018, Listowel Honda
Have you ever walked into a bank and asked what kind of interest rate you can get for a car loan? You will be surprised to find out that the lowest rates they can offer are upwards of 7% (and that's usually only for those of us who have excellent credit), which is also why many loan officers will suggest a Line of Credit.
Many of us have gone through this, and have received either a secured or unsecured Line of Credit or LOC through our respected Financial Institution, and while the interest rate on these LOC's may appear to offer a better solution for financing a vehicle, there are several different reasons why a LOC is not the optimal choice for your next vehicle purchase. If you do your research, you may find that the devil is in the details so to speak. If you are still convinced to use your LOC, we would highly recommend speaking to your loan officer to determine a few key items before proceeding with an advance.
KEY QUESTIONS TO ASK:
WHAT IS MY INTEREST RATE?
While many customers are either led to believe or have become confused on their actual interest rate. You may believe you have a rate of 1.99% or even 2.99%, however, you may have that rate plus whatever the PRIME RATE is at any given moment of time, which is set by the BANK OF CANADA, not your own lender. While this not only means that you may be paying a higher interest rate than a dealer can offer, it also means that your interest rate can vary depending what the PRIME RATE is at the time, and if you do your research, you will see that the PRIME RATE in Canada has been at an all time low since 2009, meaning that the only direction it likely will go is up.
IS MY LINE OF CREDIT SECURED BY MY HOME?
When we as customers begin the loan application process, we all have full intention of paying the loan in full, but sometimes unforeseen circumstances come up, and there is a struggle to continue with the payments. With secured LOC's, the collateral put forth for the loan is your home, which means that if you default on the payments, the bank has the right to take your home and your car, while atleast with an automotive loan it would only be the vehicle as it is used as the collateral for the loan.
WHAT IS THE MINIMUM PAYMENT AMOUNT?
Line of Credits are notoriously known as the "Never, Never Plan", as many of us are aware that you are only required to make the minimum payment to continue to be in good graces with the lender. What you may not know is how much the minimum payment requirement is, as most lenders require 3% minimum payment. To give you an example, 3% of $20000 is $600. That means that until you've paid enough down on your LOC, you're likely looking at a higher payment than you would if you were to go through a structured loan with a dealership, which brings up the other issue with a LOC, which is the lack of structure. What tends to happen to those who continue to make only the minimum payment on a depreciating asset - in this case the vehicle - is that when they attempt to sell or trade in their vehicle, they still owe far more on their line of credit than what the vehicle is worth, creating a situation of negative equity.
This leads right into another potential pit fall which is the allocation of funds from the Line of Credit. Many of us use our LOC's for emergency purposes or opportunities to purchase something that doesn't offer a financing plan, which sometimes clouds the judgement of how much is owed for the vehicle, and how much is owed for any other items. Most customers are better off saving their LOC's for the unexpected leaky roof repair, rather than tie it up with a vehicle, and be strapped in their time of need.
CAN THE BANK WITHDRAW MONEY FROM MY ACCOUNT WITHOUT MY PERMISSION?
One of the main concerns for a Lending Institution is risk, but usually that's only when you are applying for a loan, right? Well, maybe not, as with your LOC, the bank reserves the right to demand PAYMENT IN FULL should they see an increased risk in your credit history. They also reserve the right to WITHDRAW MONEY OUT OF YOUR ACCOUNT at any time, should they feel you aren't meeting their standards.