So you're interested in purchasing a pre-owned ATV and might be weighing the options of financing it to buying it outright. Fortunately, in Canada, there is an array of excellent choices that will become available to you if you decide on going the lending route. In fact, it might seem that there are simply too many alternatives to determine which dealers or lenders are providing the best advice. This article aims to give you a head start with the knowledge you need to secure your loan with confidence.
Am I better off financing an ATV or buying it outright?
This depends entirely on the individual and their unique situation. Financing an ATV can alleviate the pressure of making a large purchase all at once while also building credit with the right lenders. If you have the funds readily accessible and it won't impact your daily life, it is generally recommended to avoid taking on any debt. However, many people are not in that position and find it more suitable to make affordable payments. Bearing that in mind, it is crucial to ensure that the lender is a reputable one. More information on that topic can be found below.
Credit Score Requirements to Get an ATV Loan in Canada:
In Canada, financing an ATV is possible for individuals with a wide range of credit scores including those in a bad credit situation. An applicant's credit score is not the sole element taken into account when granting approval which may come as a surprise to those with higher credit scores when they receive an approval that doesn't meet expectation. Things such as past installment history, current debt load, and the volume of repayments all factor into the lenders' risk assessment.
Regardless of whether your credit is good or bad, seeking a second opinion is crucial to ensure you secure the most favorable rates. Numerous dealer brokers have connections with multiple lenders; it's advisable to choose one that reduces the number of credit checks they conduct and doesn't benefit from offering you a higher interest rate.
Secured Asset Loans vs Unsecured Loans Explained:
As noted earlier, there are various lending options available when it comes to obtaining an ATV loan. For premium customers with excellent credit, the most attractive option is an unsecured loan. Mainly provided by Canada's largest banks, these loans are typically structured as either a line of credit or as a cash loan without direct ties to the specific asset. This option, however, is also the most challenging to obtain, as it demands near-perfect credit and minimal outstanding debt. It's important to note that even though this loan doesn't specifically use your ATV as collateral, lenders may still have the right to repossess it in case of default, just as they would with any of your other assets.
Consequently, the majority of ATV and recreational loan options are presented as secured loans, utilizing the financed asset as collateral. One benefit of a secured loan is that lenders often provide pre-approval, allowing you to know your rates, limits, and terms in advance. An additional advantage for the buyer is that most secured loans necessitate the unit to possess an appropriate book valuation to satisfy approval requirements. If a unit fails to meet the book value, lenders may require a down payment or even recommend seeking an alternative option. It's essential to remember that book value is not equivalent to market value; the difference is explained below.
The Difference Between Book Value and Market Value Explained:
Understanding the difference is relatively simple. The "Blue Book" assigns a standardized valuation for every year, make, and model of an ATV, extending back through numerous decades. This valuation serves as a fundamental guideline for approximate value, used by insurance companies and lenders. Typically, valuations are categorized into three groups: "clean" (low mileage without damage), "average" (moderate mileage and/or minor damage), and "rough" (high mileage and/or evident flaws). Despite the fluctuations in market prices, Blue Book values steadily depict depreciation every quarter over the years. It is crucial to emphasize that Blue Book value does not include any upgrades or add-ons, and is nearly always less than the true market value.
In contrast, "market value" represents the current pricing in the market based on comparable ATVs. This pricing is subject to substantial fluctuations as demand and availability of units rise or fall. Market value typically includes upgrades and add-ons. Nonetheless, most lenders don't regard these upgrades as substantial and often exclude labor costs from the valuation. The prevailing "market value" of a unit is generally determined by the lender or insurer at the precise moment of inquiry.
Distinct Differences Between a Recreational ATV Loan and an Automobile Loan:
When considering financing for an ATV, people often compare the process to their experience when purchasing an automobile. Although there are certainly similarities between the two, some notable differences exist as well. First and foremost, it's important to note that ATVs are not considered an essential mode of transportation for daily use, especially in Canada where riding may be limited to certain seasons due to drastic weather fluctuations. As a result, lenders view ATVs as higher risk, since owners may not prioritize maintenance as diligently as they would with their primary vehicle. This increased risk is the primary factor behind interest rates being 3-5% higher at the lowest point, with some exceptions for manufacturer financing, as explained below.
The Pros and Cons of ATV Manufacturer Financing:
Manufacturer financing is commonly offered by OEM chain dealerships, primarily on brand-new ATVs, as an attractive incentive for people to finance directly with them. Typically, these financing options provide more favorable rates than private lenders and may also come with added incentives, such as cashback or deferred payments for a specific period.
Pros of manufacturer's financing:
- If you're exclusively interested in purchasing a new ATV, you're likely to receive the most favorable rates.
- You can often secure extra benefits, such as cashback, zero down payments, or deferred payment plans.
- You may be able to negotiate the interest rate. Some OEMs will provide incentives to their sales team to sell at a higher rate. If the sales team thinks you're about to walk away, they might entice you with an even better "one-time" approval.
Cons of manufacturer's financing:
- Your choices are limited to that specific manufacturer, and often only apply to new ATVs.
- You still need to qualify for the most favorable rates. If you don't, you may end up with a worse rate than what a private lender would have offered. Most OEM dealers won't present options beyond the manufacturer's financing unless you're completely declined by their program.
- Sales pressure is typically high, as the team may receive incentives to sell at a higher rate. They might also have a quota to meet, which could foster overenthusiastic sales tactics.
Avoiding Lenders Who Charge Early Payout Penalties:
It is strongly recommended that you exclusively engage with trustworthy lenders who explicitly state in their agreement that they accept early payments and impose no penalties for early buyouts. Typically, this is indicated in your agreement under a "prepayment" section. This type of lender tends to also use shady advertising methods such as "everyone approved" or "guaranteed financing".
While this video focuses on auto leasing, many of the principles do still apply.
The Pros and Cons of Leasing an ATV:
In many cases, one might consider leasing versus financing. Through our experience, the majority of buyers are better suited to go the financing route other than in very specific instances as leasing provides the ability to skirt regulations. Here is a breakdown of the pros and cons:
Pros of Leasing an ATV:
- May be possible to expense under Canadian business tax laws if used for business purposes.
- Lower monthly payments as you are typically locked into paying the depreciation of the ATV rather than the cost of the unit.
- Less commitment as you are not required to take ownership at the end of the term.
Cons of Leasing an ATV:
- Many leasing providers will heavily penalize early buyouts or require the entire interest amount to be paid out even if you decide to pay early.
- Potential for higher cost as you are essentially paying for the depreciation of the ATV without gaining ownership equity in it.
- Potential mileage restrictions with penalties for exceeding.
- Potential fees for excessive wear and tear which is judged by the lease provider. This leaves it open for penalties that you may not entirely agree with but are at the discretion of the lease provider.
- Lack of true ownership as at the end of the lease term there will still be a buyout amount. Depending on the structure, this could end up being more than the value of the unit at that time.
- Limited choice as typically leasing providers are extremely strict on the valuation of the unit with a strong preference for brand new units.
- Customization may be limited by providers since you do not truly own the unit.
Ultimately, choosing between leasing and financing comes down to personal preferences and individual circumstances. While leasing may offer lower monthly payments and tax exemptions for businesses, it can be cannibalistic in nature when early payout restrictions are in place. Financing typically provides much more freedom to customize and upgrade the ATV, with a much higher potential for long-term cost savings. It is essential to carefully evaluate the terms and conditions of each option and choose a reputable lender that offers fair and flexible terms.
Adding a Co-Signor to your ATV Loan:
In some situations, a co-signer may help you secure approval from a lender who would have otherwise rejected your application. However, if you have already received approval, adding a co-signer may not necessarily result in a better interest rate. This is because lenders often base their offers on the less favorable credit profile between the two applicants. Furthermore, for secured recreational loans in Canada, the majority of lenders typically allow only a common-law partner or spouse to be a co-applicant. This is because the ATV serves as collateral for the loan. In situations where repossession is required, recovering an asset co-owned by several unrelated individuals can be challenging compared to one owned by individuals in a common-law or marital partnership.
How Paying an ATV Loan Might Help a Credit Score:
Some recreational lenders in Canada report to credit bureaus such as Equifax or TransUnion. With these lenders, a series of consistent, positive payments can help increase your credit score, provided that there are no other factors negatively impacting it simultaneously. However, it's important to note that your credit score may initially decrease slightly as your debt ratio increases upon taking out the loan. To understand the reporting practices of the lender or dealer you are working with, make sure to inquire about their specific policies.
Keeping these suggestions in mind, along with using practical judgment, will significantly contribute to securing the most suitable loan option for you and aren't tied solely to ATV financing. Many of these tips apply to motorcycle loans, boat financing, and even if you're looking to finance an RV. Make sure to carefully read your contracts and comprehend the payment amount, frequency, and term length of your loan. Additionally, be aware of any fees associated with the loan, as lenders and dealers often charge administrative or documentation fees. Our handy ATV loan calculator is a great double-check to ensure the payments are lining up with the promises.
Finally, when searching for a used ATV, it is important to conduct thorough research and don't hesitate to ask as many questions as necessary to feel at ease with both the unit in question and the loan terms. Keep in mind that the dealer or lender's responsibility is to ensure you are confident in your selection. If you would like some more information that might help out, be sure to check out our guide to buying the perfect quad for you in 2023. Happy shopping!