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.
Minimum Requirements To Get A Car Loan Approval
Here are some of the minimum requirements you’ll need to get a car loan approval. Ensuring you meet these requirements will help reduce your odds of being rejected.
- Credit check. Most car loan lenders will require a hard credit check. While some lenders accept borrowers with good or bad credit, others may have a minimum credit score requirement. Generally, the minimum credit score for a car loan approval is between 630 – 650. So be sure to check your credit score prior to applying to ensure you meet the lenders minimum credit requirements.
- 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, the 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.
- 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.
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:
- 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.
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:
Improve Your Credit Score
Your credit score is a common factor used by lenders when determining your creditworthiness. Generally, a high credit score can help increase your car loan approval odds and help you qualify for a lower interest rate.
As such, it’s important to check your credit score before applying for a car loan, which you can do for free through Compare Hub. If you find you have a bad credit score, it’s best to improve your credit before applying if you don’t need the car loan immediately.
Good credit ranges from between 660 and 900, and this category usually qualifies for the best loan terms. Bad credit ranges from 300 to 559 and may have difficulty accessing a loan from a conventional lender.
Learn More: How To Improve Your Credit Scores
Do You Meet The Car Lender’s Minimum Income Requirement?
The amount of money you bring in on a regular basis tells a lender whether you can afford to make your payments. If your lender has a minimum income requirement, be sure you meet that requirement. If not, choose a different lender.
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.
Lower Your Debt-to-Income Ratio
Your debt-to-income refers to the amount of debt you have compared to your monthly income. Basically, lenders use this ratio to determine whether you have enough money available to afford another loan after you repay your current debt and expenses.
Naturally, a lower debt-to-income ratio is preferred. As such, paying off debts before you apply for a car loan can help you qualify.
Learn more: What Is Debt-To-Income Ratio And How To Calculate It?
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 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.
Put Down A Higher Down Payment
Finally, if you are able, a good way to improve your chances of a car loan approval is to offer a higher amount of money upfront. If you increase your down payment, you can gain access to better interest rates and a higher loan amount. However, if spending that money upfront will impact your ability to pay the loan installments, it is not a viable solution.
Learn More: How Much Should A Down Payment For A Car Be?
More Tips On Getting A Car Loan Approval
Gather all relevant information before you apply for the loan. It will put you in a better position when speaking with lenders. Additionally, it lets you know what to expect from the situation. There are a couple of key steps you can take. These include:
Get A Pre-Approved Car Loan
Before you approach lenders directly, get yourself pre-approved for a car loan. It will give you an understanding of how much credit you can access. It will also give you a picture of what interest rates and terms you can expect.
Plus, with pre-approval, you are in a better position to approach an alternative lender where the conditions are more flexible. You can use the pre-approval as a way to negotiate your terms.
Learn More: How To Get A Car Loan Pre-Approval
Compare Car Loans
To get the best possible terms on your car loan, check with a comparison site before you lock into an arrangement. With the help of a loan comparison site, you can get a side-by-side comparison of loan rates and terms.
By gaining a more thorough understanding of the options that are open to you, it’s easier to make the right decision. Take your time and ensure that you are happy with the terms of the car loan.
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, private lender or credit union.
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.
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.
Can You Get A Car Loan Approval With A Bank Or Credit Union?
Banks and credit unions 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. Unlike an alternative lender, instead of demanding a higher interest rate, banks and credit unions will just deny the loan.
Can You Get Approved For A Car Loan With An Alternative Lender?
A proven approach for those with poor credit are alternative lenders. They are more flexible in their approach and often have low income and credit requirements. However, it will result in you paying a higher interest rate on the car loan.
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 downpayment is required.
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.
