Understanding Vehicle Loans

Understanding Vehicle Loans

Vehicle financing can be an intimidating subject to breach—especially when you don’t know the ins and outs of the topic, only that it’s going to cost you a lot of money. Let the team at Welland Honda’s Finance Department go over how vehicle loans work, so that you can shop for your next vehicle with confidence.

Understanding Vehicle Loans with Welland Honda

There’s truly no need to be concerned when it comes to vehicle financing, as it’s not an overly-complicated concept at all. Usually the first step toward feeling confident in something is understanding how it works. At Welland Honda, we’re absolutely committed to making the vehicle buying experience as simple as possible, which is why we’re happy to show you exactly how it all works. Just read on to learn more about how car loans work, before coming in to purchase your next new vehicle!

How Does A Car Loan Work?

The reality is, car loans are quite simple because they only revolve around three important factors, those factors being:


The first major factor in your car loan is the principal, or the total cost of the vehicle that you’re purchasing. Forget the sticker price, the principal includes everything from taxes and dealership fees to accessories, warranties, optional equipment, etc. Oftentimes smaller dealerships and lenders will add extra fees in addition to the cost of the vehicle, especially when dealing with buyers with subprime credit. While this is often done to protect the dealership when dealing with higher risk customers, it’s always something to be wary of. At Welland Honda, we won’t charge you any additional fees, or try to hide any costs in the fine print. However, it is always worth going through your bill of sale on a point by point basis with our finance manager, to ensure that you understand each cost associated with the vehicle you’re buying.


The second factor relating to a vehicle loan is term, i.e. the amount of time you’ll be making payments on the principal cost. Set out over months (in most cases), your term can range anywhere from 12 months to 96 months, although most commonly you’ll find a term of between 36 and 72 months. Term is an incredibly important thing to factor in when you’re financing a vehicle, with the choice between a longer or shorter term based off of your financial situation and needs. Short term vehicle loans will have a higher biweekly (or monthly) payment due to paying a larger amount over a shorter period of time, though this does cause less interest to accrue. A longer term loan will result in more interest payments over time, however it also means your monthly or biweekly payments will be smaller. Your term will depend greatly on the principal cost of the vehicle, your budget, and the type of interest rate (see below) you qualify for. If you’re ever in doubt, a member of our finance team will gladly help you determine the best term for your situation.

Interest Rates

The third factor in your vehicle loan, and easily the most variable, is the interest rate you qualify for. Oftentimes you’ll see dealership ads for an incredibly low interest rate with verbiage like OAC, which simply stands for on approved credit. Your interest rate is the percentage you will be charged by the lender, after they look into your credit history. The interest rate is applied to the principal cost of the vehicle, and then split up over the length of term you’re paying for the vehicle. This is why, as outlined above, a shorter term loan will result in less interest than a longer term loan. This is the portion of the vehicle loan process where your credit history will have the greatest impact. A perfect, super prime credit score will mean you can qualify for the lowest rates offered by the dealership, whereas a prime credit score will result in a higher interest rate, and a subprime credit score will result in a higher interest rate still. If you have subprime credit, it’s especially important to work with a dealership you trust (and that has your best interests at heart). Predatory lenders will work with customers with exceptionally poor credit, charging prohibitively high interest rates which lead to a cycle of missed payments and continued poor credit.

Why Finance With Welland Honda?

At Welland Honda we pride ourselves on being open and honest with our customers when it comes to financing. While vehicle loans can seem like a scary proposition, our team will work with you so that you not only understand how your money is being spent, but that it’s being spent wisely and within your budget. If you’re ready to start the process of applying for financing, simply click here, or if you’ve still got questions come visit a member of the Welland Honda finance team to learn more about what you can afford in a new vehicle.