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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 amenable 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. 

Minimum Requirements To Get A Car Loan Approval

Whether you use a personal loan or a car loan to buy a car, 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. Here are some of the minimum requirements you’ll need to get a car loan approval.

Minimum Requirements For Car Loan Approval

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

  • Credit check. Car loan lenders will request that you undergo a 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.
  • Income requirement. The income level required to get a car loan will vary based on the lender you choose. While some lenders require a minimum income of $1,200, others may require a minimum income of $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. 

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. 

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 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.

Calculate Your Car Loan Costs

Wondering how much your car loan will cost you? Use this car loan calculator to estimate your car loan payments based on your credit health.

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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.

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 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:

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 or ill-established 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.  

Car Loan Approval FAQs

How much income do I need to qualify for a car loan in Canada?

Generally speaking, you’ll need a monthly income of at least $1,200 – $1,800 to qualify for most car loans. If your income is less than that, you’ll likely have difficulty getting approved.

Can I qualify for a car loan with bad credit?

If you have bad credit, consider looking at used vehicles to get a lower price on a car and reduce the amount you have to borrow. If possible, make a larger down payment to reduce the loan amount and show the lender that you have the financial means to cover car loan payments. You might also want to consider adding a co-signer to the loan contract to reduce the lender’s risk and increase your chances of loan approval.  Finally, get pre-approved for a car loan so you know exactly what you can afford based on your credit score. 

What is the lowest credit score needed to buy a car?

Generally speaking, you need a credit score of at least 630 to 650, though the minimum score will depend on the lender. If your score falls under this threshold, consider applying for a car loan with an alternative lender.  

How much money should I put down to get approved for a car loan?

A down payment of at least 20% of the purchase price is generally recommended on new car purchases, which will help you keep your loan costs down. If you’re buying a used vehicle, at least 10% is suggested.

Should you get pre-approved for a car loan?

Yes, you should consider getting pre-approved for an auto loan before shopping around for a vehicle. This will help you get a clear idea of how much you can afford and what type of loan you can get approved for based on your income and credit score.

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.

Glossary

TERMDEFINITION
Add-OnsAny 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 PriceThe 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 TitleA 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.
DealershipAuto dealerships are businesses that are authorized to sell new or used automobiles to consumers and serve as a direct dealer for automakers
Dealership FinancingConsumers 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.
DepreciationDepreciation 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
TERMDEFINITION
Extended WarrantyVehicles 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.
TERMDEFINITION
LeaseA 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.
TERMDEFINITION
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.
TERMDEFINITION
Title LoanA 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 AllowanceA 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 ValueA 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.
TERMDEFINITION
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.
Lisa Rennie avatar on Loans Canada
Lisa Rennie

Lisa has been working as a personal finance writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same.

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