Applying for a car loan can be stressful when you don’t know the requirements to qualify. To get a car loan approval, especially one with favourable terms, you’ll need to meet certain financial and credit requirements.
The good news is that there are many companies across Canada that specialize in car loans for all types of borrowers. By understanding what to expect, you can plan ahead and improve your chances of getting approved for a car loan that works for you.
Key Points You Should Know
- In order to be approved for a car loan, you’ll need to show the lender that you can afford the car loan payments.
- Lenders will generally assess your ability to make payments by checking your income, debts and credit score.
- To increase your chances of approval, consider first getting pre-approved. You can also reduce you debt-to-income ratio, increase your down payment or add a cosigner to strengthen your odds of approval.
How To Get A Car Loan Approval In Canada
Getting approved for a car loan in Canada can seem like a challenging task, but by understanding the general requirements, you can help increase your odds of approval.
Depending on the car you’re looking to purchase and the lender you’re applying with, requirements may vary. However, here are some of the factors most car loan lenders will look at when approving a car loan:
Minimum Car Loan Credit Score
While there are no universal minimum credit score requirements for car loans in Canada, a credit score of 660 and above will help you secure the best car loan offers.
That said, you can still get a car loan if you have bad credit. Many lenders and dealerships offer car loans to those with bad credit so long as they meet their other requirements such as income, debt-to-income ratio, and job stability. However, it should be noted that you may be charged a higher interest rate due to your credit score.
As such, it’s important to check your credit score before applying for a car loan to understand where you stand and ensure you meet the lender’s minimum credit requirements, which you can do for free through Compare Hub.
Learn What Credit Score Do You Need For A Car Loan?
Minimum Car Loan Income Requirement
The income level required to get a car loan will vary based on a number of factors such as the car loan amount, your current debt obligations, and the lender you choose. In general, most lenders require a minimum income of $1,200 to $1,800.
However, regardless of what your income is, to get a car loan approval, you’ll need to show your lender you can afford the car loan payments after fulfilling your current debt obligations. Lenders use your debt-to-income (DTI) ratio to determine whether you have enough money available to afford another loan after you repay your current debt and expenses. Generally speaking, a DTI ratio no higher than 44% is generally recommended to increase the chances of loan qualification.
Learn more: What Is Debt-To-Income Ratio And How To Calculate It
Income Stability
Having a steady income can also help improve your car loan approval chances. A steady income signals that you may be a low-risk borrower. This is because a steady income shows that you consistently bring in enough money to afford a car loan.
This factor can be particularly important if you have bad credit. By showing your lender you have a reliable source of income that can cover your car loan payments, your lender may be more willing to approve you despite bad credit.
Make A Large Down Payment
If you are able, a good way to ensure a car loan approval is to offer a higher amount of money upfront. By putting more money upfront, you’ll reduce the lender’s risk as your car loan is less likely to end up upside down.
By lowering your risk, you’ll have a better chance of getting a car loan approval. Moreover, you can gain access to better interest rates and terms.
Learn More: How Much Should A Down Payment For A Car Be?
Documents Required For Car Loan Approval
To apply for a car loan, you’ll need to provide certain documents. Here are some of the basic documents you’ll need to apply:
- Driver’s license. In order to purchase a car, you will need a valid driver’s license.
- Age requirement. To apply for a car loan in Canada, you will need to be either 18 or 19 depending on the province you live in.
- Proof of residence and identity – You’ll need to provide photo identification such as a driver’s license or passport. Most companies will require a supplemental ID for their verification process. You can use many things to prove your address, ranging from proof of ownership to a Hydro bill.
- Proof of income – Additionally, you will need physical proof of your income. This can be in the form of pay stubs and bank statements. Be sure that you have records going back at least three months.
Where Can You Apply For A Car Loan?
There are many different car loan lenders you can apply with in Canada. You can apply with a bank, car dealership, credit union, bank, manufacturer, or private lender.
Can You Get Approved For A Car Loan With A Dealership?
Taking advantage of in-house financing is one of the most popular ways for bad credit borrowers to gain access to a car loan. While not all dealerships are willing to work with bad credit consumers, this is still an option you should consider. In addition to in-house financing, many dealerships also partner with banks, credit unions, and other lenders.
Just keep in mind that you will need to speak with several dealerships and compare their offers. Furthermore, your loan will be more expensive so make sure you budget appropriately. While dealership financing can be convenient, it’s important to compare interest rates and terms with other lenders to make sure you’re getting the best deal.
Who Is Dealership In-House Financing Best For?
Dealership in-house financing is best for those who:
- Have bad credit and need more flexible approval criteria.
- Prefer the convenience of buying a car and obtaining financing in one spot.
- Are looking for promotional offers, such as 0% interest rates.
Can You Get Approved For A Car Loan With A Car Manufacturer?
Manufacturers provide car loans through their financing divisions, such as Toyota Financial Services. These options are usually accessible directly at the dealership and often feature incentives like 0% financing or cashback offers.
Who Is Manufacturer Financing Best For?
Car financing through a manufacturer is best for those who:
- Are buying a new vehicle from a specific manufacturer.
- Are looking for promotional deals.
- Have good credit.
Can You Get A Car Loan Approval With A Bank?
Banks have high standards; and, as a result, it can be very hard to qualify for these loans. The standards for income and credit scores are substantially higher than those held by other lenders.
As a result, unless you have excellent credit and can prove a steady source of income, this is not the best way to go. That said, if you’re a homeowner, you could use the equity in your home to secure a HELOC and use it to purchase a car. HELOCs can be easier and more affordable to qualify for due to the collateral they provide.
Who Is Bank Auto Financing Best For?
Car financing from a traditional bank is best for those who:
- Have excellent credit.
- Want the lowest possible interest rate.
- Want the convenience of dealing with their bank.
Can You Get A Car Loan Approval With A Credit Union?
Yes, you can get car financing at your local credit union. Credit unions typically have more flexible lending requirements and offer lower interest rates than alternative lenders. Credit unions are also known for providing customized service to their clients.
However, you’ll first need to become a member to apply for a car loan with a credit union.
Who Is Credit Union Financing Best For?
Car financing from a credit union is best for those who:
- Are looking for more competitive rates compared to traditional banks.
- Are members of a credit union and appreciate personalized service.
- Have less-than-perfect credit.
Can You Get A Car Loan Approval With A Private Lender?
A proven approach for those with bad credit are private lenders. They are more flexible in their approach and often have low income and credit requirements.
Private lenders can provide auto loans via individual financing or their partnered car dealers. However, it will result in you paying a higher interest rate on the car loan due to the higher risk for the lender.
Though this will lead to you paying more for the vehicle, it is still a good way to access a car loan. Like the vast majority of car loans, a down payment is required.
Who Is Private Lender Financing Best For?
Car financing from a private lender is best for those who:
- Have bad credit.
- Have trouble qualifying for a car loan through traditional routes.
- Need quick loan approval.
How To Increase Your Car Loan Approval Odds
Having the documents is one thing. Qualifying for the loan is another. Regardless of who you approach for the loan, whether it’s a bank, a dealership, or an alternative lender, there are ways to help you increase your odds of approval. These include:
Get Pre-Approved
One of the best ways to increase your odds of approval is by getting pre-approved for a car loan. A car loan pre-approval will give you an understanding of how much credit you can access and what interest rates and terms you can expect.
Many online car lenders and dealerships will allow you to browse cars that you’re pre-approved for, which can help you avoid looking at cars outside of your budget.
| Note: Get multiple car loan pre-approvals so you can compare offers and get the best possible terms on your car loan. |
Learn More: How To Get A Car Loan Pre-Approval
Get A Co-Signer
If you’re unable to qualify for a car loan on your own, having a co-signer with good credit can make you eligible for a loan. With a cosigner, your financial and credit profile is not considered. So long as your co-signer qualifies, you’ll be able to get approved for a car loan.
However, keep in mind that the co-signer will be equally responsible for the payments as you are. So if you miss payments, your cosigner will also be held responsible which could negatively affect their credit and finances.
Choose A Lower-Priced Car
If you are struggling to qualify for a car loan, one of the best things you can do is look at something more in your price range. Especially if you are looking at a higher interest rate (and thus a higher total overall), it might be better to choose a lower-priced vehicle. Look into certified pre-owned vehicles or downgrade the features as a way to reduce the loan amount.
Final Thoughts
The key to qualifying for a car loan is doing thorough research. There are many steps you can take to improve your odds of getting amenable terms, including familiarizing yourself with different lenders. This is where Loans Canada can help. We can match you with multiple offers that meet your needs so you can compare your options and find the best car loan for your budget.
