How to Qualify For a Car Loan

How to Qualify For a Car Loan

Written by Corrina Murdoch
Fact-checked by Caitlin Wood
Last Updated November 4, 2020

Accessing a car loan, especially one with amenable terms, can be a stressful situation. Whether you lack a credit history or have poor credit, it can be challenging to qualify for a loan that works. The good news is that there are many companies across Canada that specialize in car loans for those of all credit standings. By understanding what to expect, you can plan ahead and improve your chances of getting a loan that works for you. 

Car Loan Options

There are many different ways to approach car loans. The first thing to consider is your credit status. Your borrowing history will directly impact your eligibility for a new car loan. Different lenders have criteria you must meet. Some are very rigid in their practices and focus on credit scores and debt-to-income ratio as the primary factors. Other lenders are more flexible and enable you to use your income history and a higher down payment in order to qualify. Getting the best car loan for your personal situation relies on you choosing the right provider. Among the options for potential lenders are:

Dealerships

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.

Banks & Credit Unions

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. 

Alternative Lenders

A proven approach for those with poor or ill-established credit, alternative lenders are more flexible in their approach. Usually, 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 loan. Like the vast majority of car loans, a downpayment is required.  Depending on the amount you are going to take out, you will need more money down. This will impact your eligibility for the loan, and you are likely to still need to pay a high-interest rate.  

What Do You Need to Apply For a Car Loan

In order to approach the application process, there are a few things you need to have on hand before you get started. In terms of both paperwork and financial standing, it is best to prepare beforehand. Consider all the aspects of your monetary situation and be sure that you can prove where you are getting your money. 

Minimum Requirements

When applying for a car loan, regardless of your credit score, there are a few minimum requirements that you will need to meet. 

  • Income requirement. This will depend on the lender you choose, but all lenders will want to know you can afford the monthly 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.
  • Credit check. Car loan lenders will request that you undergo a credit check.

Thinking of working with an alternative lender? Check out what these bad credit lenders look at when assessing loan eligibility?

Documents Required

Documents you will need include, proof of residence and photo identification. 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. 

Additionally, you will need physical proof of your income. This can be in the form of pay stubs, though it is better to use bank statements. Be sure that you have records going back at least three months. 

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How Do You Qualify For a Car Loan? 

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 criteria you must meet. These include:

Credit Score

Speaking to your history as a borrower, your credit score is always a factor in qualifying for any kind of loan. Your credit score is the number assigned to your financial file, as assessed by Equifax and TransUnion. Good credit ranges from between 680 and 900, and this category usually qualifies for the best loan terms. Bad credit ranges from 300 to 679 and may have difficulty accessing a loan from a conventional lender. 

Check out what credit score you need to get a car loan

Income

The amount of money you bring in on a regular basis tells a lender whether you will actually be able to make your payments. A steady income informs the lender that you are lower-risk since you show that you consistently bring in enough money to afford a car loan. You can use pay stubs to prove your income, though the more common approach is providing your bank statements.

Check out how to budget the costs of buying a car

Debt-to-Income Ratio

Your debt-to-income refers to the amount of debt you have compared to your gross monthly income. Basically, lenders use this ratio to determine whether or not you have enough available money to make your loan payments each month. You will need to provide your lender with proof of income, as we discussed above, and also a list of your current debts. Naturally, a lower debt to income ratio is preferred

Co-Signer

If you’re unable to qualify for a car loan on your own, having a co-signer with good credit, it can make you eligible for a loan for which you may not have otherwise qualified. Keep in mind that the co-signer will be equally responsible for the payments as you are. It puts a lot of financial obligation on the co-signing party. However, if the situation allows, this is a proven way to access loans. 

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 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 qualification 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 up front will impact your ability to pay the loan installments, it is not a viable solution. 

New vs. Used Cars

Research Before You Apply 

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 Pre-Approved

Before you approach lenders directly, get yourself pre-approved for a loan. It will give you an understanding of how much credit you can access. The pre-approval process shows you what information is needed to determine the loan for which you qualify. It will 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.

Compare

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.

Was your car loan application rejected? Find out why here

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.

Car Loan Glossary

Terms
Add-Ons

Any features or services that are applied on top of the base price of a car are considered add-ons. These can include things such as tinted windows, heated seats, leather seats, alarms, and wheel locks, to name a few.

Base Price

The base price of a car is the cost of the vehicle without any upgrades or added features that can be added after the car is ordered from a dealership. Only standard equipment and the manufacturer’s warranty are included in the base price, but any other fees will be added afterward.

Certified Pre-Owned (CPO)

CPO cars refer to used cars that have been certified, either by the dealership selling the car or the manufacturer of the vehicle. This gives consumers confidence knowing they are buying a used vehicle that is in good condition. When a used car is obtained by a dealership, it is inspected by a certified mechanic. The car is then repaired if it meets the required standards and is then ready to be sold as a CPO vehicle.

Clear Title

A clear title means that the owner of the car has a free and clear title and no longer carries a balance owing on a car loan. There are no liens of the title or levies from creditors.

Dealership

Auto dealerships are businesses that are authorized to sell new or used automobiles to consumers and serve as a direct dealer for automakers

Dealership Financing

Consumers can obtain dealer financing to help fund the purchase of a vehicle. A contract is signed with a dealership that requires a consumer to pay for a specific amount plus interest and funding fees over a certain period of time. Dealers will send the details of the consumer’s financials to various lenders to find one that will approve the loan.

Depreciation

Depreciation refers to the decline in the value of a vehicle. Immediately after purchase, a vehicle will become less valuable as soon as it is used. Put another way, depreciation is the rate at which an automobile loses its value over time

Extended Warranty

Vehicles come with a manufacturer’s warranty when purchased, but buyers can choose to purchase an extended warranty. This serves as a form of insurance policy on the vehicle to cover the cost of potential repairs in the future. An extended warranty is usually good for a certain period of time and/or mileage.

Lease

A contract that allows an individual the right to use or occupy a property for a specified period of time in exchange for a monthly payment. Leases are common for a property like apartments and vehicles. The individual on the lease does not own the asset at the end of the lease’s term, it is strictly for rental purposes.

MSRP (Manufacturer’s Suggested Retail Price)

Car manufacturers will offer recommendations on how much a car should be priced at the retail level, known as the manufacturer’s suggested retail price, or MSRP. The purpose of the MSRP is to standardize pricing in the automobile industry so that there is not a lot of fluctuation in price from one dealership to another.

Title Loan

A title loan uses the vehicle title as a form of collateral to secure a loan. Borrowers must own their vehicles free and clear and no longer owe any amount on a car loan. A lender will place a lien on the car title in exchange for funds. If the borrower defaults on the loan, the lender can take possession of the vehicle and sell it to cover any losses.

Trade-in Allowance

A trade-in allowance is the amount that a car dealer will reduce the cost of a new car purchase by after the consumer’s old vehicle has been traded in. It is somewhat like being given credit from the sale of an existing vehicle that is then applied to the purchase of a new vehicle.

Trade-in Value

A trade-in value is the amount that dealerships offer consumers for their vehicle and is typically applied toward the purchase price of another vehicle. Dealerships will assess the value of the vehicle and will base the amount that can be applied to a new car purchase. The consumer will then trade in the old vehicle and the assessed value amount will be deducted from the price of another vehicle. Trade-in value is often different than what the vehicle may be worth when sold in the open market.

Vehicle Identification Number (VIN)

Every vehicle will have its own unique vehicle identification number, which is used to identify a specific vehicle. No two vehicles will have the same VIN, making them easily identifiable with this unique 17-character code.

Corrina Murdoch has been a dedicated freelance writer and editor for several years. With an academic background in the sciences and a penchant for mathematics, she seeks to provide readers with accurate, reliable information on important topics. Working as a print journalist for several years, Corrina expanded her reach into the digital sphere to help more people gain insight into the realm of finances. When she's not writing, you can find Corrina swimming and spending time with family.

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