When applying for a car loan in Canada, your credit score is an important piece that drives your options for financing. For most traditional lenders, a score of 660 or higher may be required for approval, but even with bad credit, you’ll still have some options.
What Credit Score Is Needed For A Car Loan?
When trying to determine what credit score you’ll need for a car loan, the short answer is, it depends. First of all, let’s take a look at the general credit scoring ranking system here in Canada:
- Poor: 300 – 559
- Fair: 560 – 659
- Good: 660 – 724
- Very Good: 725 – 759
- Excellent: 760 – 900
If your credit score is good, i.e. in the range of 660 to 724, you’ll generally have no trouble qualifying for a car loan with most lenders. Anything above 724 can help you get to access the most competitive loans available, which are those with the lowest interest rates and most favourable terms, as well as access to higher loan amounts.
However, if your credit score is fair or poor, your options in terms of lenders and loan products will be limited. The good news is that there are some lenders out there who specialize in providing loans to consumers with lower credit scores.
Plus, lenders don’t assess loan applications purely on the basis of your credit score. Other factors, including your income and employment history, are usually relevant.
Can You Get A Car Loan With Bad Credit?
It is possible to get a car loan with bad credit. In Canada, bad credit is usually anything that falls below 560. While you will still have options if your credit is fair or even poor, there are trade-offs to be aware of – primarily, significantly higher interest rates.
Credit scores are important to most lenders, as consumers with bad credit are viewed financially as ‘higher risk’. This results in the lender offering less favourable loan terms, such as higher interest rates or smaller loan amounts, in order to cover the risk of loan default.
But as mentioned, having bad credit doesn’t mean you’re totally out of options. There are still ways to secure a car loan, mainly through alternative lenders and dealerships that offer in-house financing.
Alternative Lenders
There are lenders that specialize in offering loans to people with lower credit scores, and some don’t even require credit checks. While the interest rates with these lenders will be higher compared to a conventional loan from a bank or credit union, they can still provide access to financing when other lenders won’t.
These lenders also tend to offer simple, fast applications and online approval, as well as more flexibility around terms and lower fees, which you won’t find with a traditional loan provider.
In-House Financing
Those with lower credit scores might also consider finding a dealership that offers in-house financing.
Some dealerships will act as both the seller and the lender, and in many cases will allow you to secure a car loan directly from them, even if your credit is poor. The primary benefit of in-house financing is its convenience since you don’t have to go and find a third-party lender to finance your car. This is on top of the fact that dealerships are often more accessible compared to traditional lenders when it comes to minimum credit requirements.
That said, as is the case with other alternative lenders, the downside here is that the interest rates and fees will be higher compared to those offered by banks or credit unions. And in some cases, rates and fees can be significantly higher, so it’s important to take your time and read all the fine print.
Is There A Minimum Credit Score For Car Loan In Canada?
There’s no universal minimum credit score required to get a car loan in Canada. Instead, different lenders will have different requirements based on their risk tolerance and lending criteria.
That means that while you may have to shop around a bit to find a lender that suits your finances, at the same time you’ll almost always have at least a few lenders to choose from.
When applying for a car loan through a bank or traditional lender, you’ll generally need a good credit score, as banks prefer to lend to borrowers with a strong payment history.
On the other hand, as we’ve seen, alternative lenders and dealerships that offer in-house financing can have lower minimum credit score requirements.
Other Factors Lenders May Look At When Offering Car Loans
While your credit score plays a significant role in loan applications with traditional lenders, others place a greater emphasis on different factors. Bad credit lenders work specifically with consumers who have lower credit scores, and they look at a few different elements to weigh in on the approval process:
Income & Employment
Many alternative and bad credit lenders will prioritize your income when assessing a car loan application, as this information can provide a reliable picture of your ability to make repayments. A steady employment record and a reliable source of income can help to offset a lower credit score in the eyes of some lenders.
Debt-To-Income Ratio
While this is also a strongly weighted aspect that goes into calculating your credit score, some lenders will look specifically at your debt-to-income (DTI) ratio. This figure measures how much of your income is used to pay off existing debts. Some lenders will look at your DTI to determine if you can comfortably take on more debt with a car loan.
A lower DTI ratio shows that you are capable of managing debts responsibly and that you’re not in the habit of taking on more debt than you can reliably pay off.
Down Payment
When applying for a car loan with poor credit, your down payment can also play a significant role. If you can come up with a larger down payment, that will in turn reduce the total amount you need to borrow, and demonstrate to a lender that you’re serious about your financial investment. For some bad credit lenders, this can be a particularly useful approach.
What Credit Score Is Needed For No Down Payment On A Car?
Zero down payment car loans are available in Canada, even for those with bad credit. Generally, when you’re applying for a no-down payment car loan, your credit score will be a crucial factor.
Given that a good to excellent credit score will signal to lenders that you’re financially responsible and less likely to default on the loan, the possibility of a zero down payment loan is more plausible for those with good credit.
That said, you may be able to secure a no down payment car loan with a bad credit score. However, the rates you get will likely be higher than those applying with good credit. Moreover, to secure a no down payment car loan with bad credit, you’ll need to show proof of a steady income and may need to provide a co-signer with a higher credit score.
What Credit Score Is Needed For A 50k Car Loan?
To qualify for a $50,000 car loan, generally, lenders will be looking for a good credit score, i.e. in the range of 660 or higher. However, ultimately it really depends on the applicant, your credit history and other factors.
While a good credit score can help you secure a loan to the value of $50,000, it’s worth remembering that you could still qualify with a score that falls short of this, albeit with a higher interest rate and potentially less favourable terms.
What Credit Score Is Needed For A Car Loan, Without A Cosigner?
To secure a car loan without a cosigner, lenders will be looking for a credit score of at least 660. With good credit or higher, you’ll have better odds of landing a competitive car loan from a bank or credit union, even without a cosigner.
However, if your credit score falls below 660, there are still some online and alternative lenders who may offer you a car loan without a cosigner.
In such cases, lenders will put more emphasis on your income, debt and down payment amount to offset the higher risk of lending without a cosigner.
If you’ve got a bad credit score you can improve your chances of being approved for a loan without a cosigner by saving up for a bigger down payment, finding a more affordable vehicle or taking some time to improve your credit score first.
How To Increase Your Credit Score?
Increasing your credit score, and keeping it healthy, can be done over time. Here are some foundational tips that can help you bring your score up:
Pay Your Bills
Payment history is the most significant factor in determining your credit score, which is why paying off your bills on time and in full is the most essential habit for improving your score.
Reduce Your Credit Card Balances
Another big factor in your credit score is your credit utilization ratio. This is the amount of credit you use regularly, relative to your limit. It’s ideal to try and keep your balances below 30% of your credit limit. For example, with a credit limit of $2,000, a strong credit utilization ratio would be no more than $600.
Avoid New Credit Applications
When you apply for a new credit card, or often with traditional loan applications, your credit will suffer temporarily from a hard inquiry. However, too many hard inquiries in a short period can make it harder for your credit score to recover.
Check Your Credit Report For Errors
One best practice for good credit is to review your credit report at least once a year. That’s because there may be inaccuracies or fraudulent activities that could be dragging your score down. Any errors can be disputed, and if successful that can help boost your score.
Keep Old Accounts Open
The duration of your credit history is also a factor in how your credit score is calculated. That’s why it’s recommended to keep older accounts open, even if you don’t use them that much.
Bottom Line
While there are no hard and fast rules around minimum credit scores for a car loan in Canada, generally speaking, the better your score is, the more access you’ll have to the best rates and terms.
That being said, you may be able to secure a car loan with fair or poor credit, even without a cosigner, by providing proof of income or a bigger down payment.
