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An estimated 84% of Canadians own a car. You use it to travel, commute, get groceries, and for just about everything else. It functions as transportation, storage, and more; but, alas, cars don’t last forever. That means searching for a new ride, hopefully at the most competitive rate possible. During the hunt for the perfect car (and price), you’re likely to encounter some industry-specific jargon like the term O.A.C.
Vehicle financing terms can be overwhelmingly technical, especially when you’re trying to track down a competitive rate. One of the most common terms you’ll encounter is O.A.C. (on approved credit). Understanding this phrase and how it plays into the automobile financing industry can help you save time and money. This breakdown details everything you need to know about O.A.C., so you can use your credit to the best advantage possible.
Where Does The Term O.A.C Pop Up?
The term O.A.C is shorthand for the phrase, “On Approved Credit”. It comes up frequently when you peruse vehicles through a dealership, whether for a pre-owned or new ride. When you’re looking through vehicles and you see those enticingly low-interest rates, check for O.A.C requirements. Dealerships use this to highlight the most competitive rate available for a vehicle. It enables them to draw attention to low prices, while subtly noting that the cost is contingent on credit. When dealerships offer to finance, they typically disclaim that it is O.A.C, meaning you must meet their credit standards to access that car loan.
What Is O.A.C?
On Approved Credit works exactly like it sounds. The dealership will set certain credit criteria which the borrower must meet to be approved for the loan. Now, the credit qualifications differ from dealership to dealership. However, you can save time by taking a realistic assessment of your credit. If the interest rate sounds too good to be true, it is likely because the metrics exceed your credit. That said, if you are able to meet the requirements, in-house financing can offer impressive rates that make cars more affordable over the long term.
How To Qualify For O.A.C Financing?
In order to qualify for O.A.C financing, you must meet the criteria of the dealership from which you are aiming to purchase a car. Some set the criteria to credit scores over 750 with a low debt-to-income ratio. Other dealers will make loans more accessible, lowering the threshold and offering a few approaches to obtain the financing. To get started with O.A.C financing, there are some standard expectations. Understanding these helps you prepare.
A Reasonable Credit Score
In order to be accepted for O.A.C, the dealership will run a credit check to look for red flags. If you have solid credit, then it should not be an issue. However, if your credit is subpar, then it can be more challenging to access this financing. Your credit is managed through two Canadian credit companies: TransUnion and Equifax. These companies track your finances and provide a three-number metric that represents your merit as a borrower.
Special Offers And Deals
There are, in some situations, special offers on vehicles. The lower price can allow you to access the financing whereas a higher sticker price would preclude it. Dealerships are known for offering the best rates at the end of the month, and especially at the end of the year. Because of the need to free up floor space and make quotas, this is when you are most likely to get O.A.C financing at a special rate.
Look For A Cosigner
If you are unable to get the loan through the dealership independently, you can opt for a cosigner. In keeping with the standard protocols for cosigning a loan, this means that both parties (you and your cosigner) are fully responsible for the loan. This makes you a much safer borrower in the eyes of the lender, especially if the cosigner has good credit and little debt.
This is a common calculation used by lenders as a way to determine if you are actually able to make the payments. By using the proof of income (bank statements, tax records, or pay stubs), the company learns your income. Using your credit report, the company also sees the amount of debt you have, broken down by each individual loan. Each dealership will set a different ratio, to ensure that you have enough liquid funds to pay the loan each month.
For example, person A earns $3,000 per month, pays $1,000 in mortgage payments and $500 in other loans. Person A has an income-to-debt ratio of 50%. Person B earns the same salary, pays $500 in mortgage payments and $500 in debt. Person B has an income to debt ratio of 66%. That means Person B has 16% more liquid funds to pay the to-be car loan and is thus more likely to qualify for O.A.C financing.
How Do Car Dealerships Check If You Qualify For O.A.C?
Determining whether you qualify for an O.A.C financing agreement takes little time and is generally straightforward.
- The dealership uses your Social Insurance Number (SIN) to do a credit check. Because it is for a vehicle loan, these are hard credit checks. The dealership will usually fund the number through both Equifax or TransUnion. Alternatively, they can use several services available to businesses.
- Using your credit profile, the dealership determines your risk factor as a potential borrower. This is done using an actuarial algorithm (set of equations), that checks for things like missed payments, bankruptcies, liens, and amount of debt. It also can factor in the duration at which you’ve been at an address, other credit inquiries, and how you manage your utility bills.
- Next, the dealership takes your banking information and may request references from your employer. This is meant to lend assurance that you are not likely to lose the job during the term of the loan. It also indicates how much you earn. This is used, in conjunction with your credit profile, to determine your income-to-debt ratio.
- Depending on the dealership, the requirements will differ. Each lender is simply trying to determine if you are able to repay the loan per the terms. Assuming you are, you receive approval. Otherwise, they will inform you that you don’t qualify and you can take the next steps to ensure your access to other financing.
How To Ensure You Get O.A.C Financing?
The best way to make any financial move is to plan it out in advance. Sure, if your engine breaks down, you may need to maneuver more quickly. However, most vehicle purchases result from an aging car, a desire to upgrade, or the lack of a vehicle. In the majority of these situations, you can take the time to ensure that you get optimal financing rates. Follow the same steps as you otherwise would to become a more desirable borrower.
Grow Your Credit Score
For every utility bill or loan you have, there is a record held by Equifax and TransUnion. These companies issue a three-digit score that represents your credit, used in an actuarial sense to assess your credibility as a borrower. The higher the score, the better borrower you are. Increase your score by making your payments on time and in full consistently. Avoid letting debt build and do not carry a balance on your revolving credit card debt.
Pay Off Your Debts
Though the term ‘good debt’ has entered the zeitgeist, debt by any other name is still money you owe that gathers interest. Showcasing your ability to pay off a loan prudently highlights your merit as a borrower. Another major benefit to this is increasing your income-to-debt ratio. By having smaller monthly payments due, you are better qualified for O.A.C financing.
Increase Your Down Payment
An easy way to access financing is to reduce the total loan amount. This results in smaller payments, therefore requiring a lower income-to-debt ratio. It saves you from paying more interest in the long-term and, if financially feasible, is one of the quicker and more profitable ways to access O.A.C financing.
Find A Suitable Cosigner
You cannot rely on a cosigner with low credit or a high debt-to-income ratio. A cosigner is there to add value to you as a borrower, and must themselves qualify for the O.A.C financing. Provided you have a cosigner, they are equally responsible for the full payment of the loan.
Can I get O.A.C financing if I have bad credit?
Do I need to get pre-approved for O.A.C financing?
Can I get a good rate without O.A.C financing?
It’s no secret that O.A.C financing is desirable. If you have the time to plan out your moves, you can see significant savings. Establish a budget with a view of reducing debt while saving for a down payment. Research different dealerships, and check for special rates, discounts, and available deals. Each end-of-month and major holiday comes with its own perks, if you can wait for these opportunities to make your move.
Finally, be sure to investigate all your options. Take a look at the available lenders and see how you can make your money work best for your needs. There are many ways to get ideal terms on your car loan, with O.A.C financing being one of the most popular. As long as you put in the time and effort, it is well within reach.
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