TYPES OF LOANS FOR CAR FINANCING

Before arranging a car loan, the borrower should be familiar with the types of loans that are available. Each type of loan has certain advantages and disadvantages for the borrower.

PERSONAL LOAN: VARIABLE RATE

A variable rate loan will have periodic (usually monthly) payments, calculated to repay the loan over a certain period of time (for example, three or four years.) If the Bank of Canada rate moves up or down, the interest rate for the loan will be adjusted accordingly. Your monthly payments will not change.

If interest rates rise after you negotiate your loan and continue at higher rates, you may need to make an extra payment or so beyond the term. If rates fall and stay lower, you may complete your payments a period or two early. Extra payments can be made at any time and the loan may be paid off at any time.

PERSONAL LOAN: FIXED RATE

The fixed rate loan also involves periodic (usually monthly) payments. The interest rate is "fixed" at the time the loan is arranged. Since the rate is constant, the exact pay-off date of the loan is guaranteed. Because the financial institution absorbs the risk that interest rates might rise, fixed rate loans tend to be slightly more expensive than variable rate loans. Extra payments can be made at any time and the loan may be paid off at any time.

FULLY SECURED LOAN:

A fully secured loan is a loan secured by financial assets held at the lending institution. Rates on these loans are usually close to the prime rate. Rates on these loans are bonds, term deposits, GIC's and blue chip stocks traded on the Toronto Stock Exchange.

HOME EQUITY LINE OF CREDIT:

Home equity lines are used for car financing and other major credit needs. The home equity line is secured by the equity in your home and offers a very attractive interest rate (prime). The initial appraisal, legal and administration fees will total about $500. If your anticipated borrowing needs exceed about $20,000 however, the home equity line provides an ongoing source of low-cost credit and may well be the last loan you ever need.