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Before you start shopping for a new car and a new loan to pay for it, check your credit score first. Knowing your credit score before you apply for a car loan will give you an idea of what type of offers you might get. While no set minimum credit score is needed for a car loan, a lower score means your options may be more limited. For this reason, it’s highly recommended that you check your credit score before shopping for a new car.

Key Points

  • Your credit score plays a role in your ability to get approved for a car loan and the rate and terms you’re offered.
  • It’s helpful to check your credit score before applying for a car loan to see where you stand.
  • You can check your credit score with your bank, the credit bureaus, or third-party online platforms.
  • If your score is a little low and time is on your side, consider boosting your score first before taking out a car loan.

Why Is It Important To Check Your Credit Score Before Applying For A Car Loan?

Checking your credit score before taking out an auto loan is important for a few reasons: 

Your Credit Score Affects Loan Approval

Lenders often depend on your credit score to determine your creditworthiness and ability to repay the loan. A higher credit score can increase your odds of approval, while a lower score could reduce your chances of approval. If you have a low credit score, you may need to seek out a lender who works with bad credit borrowers, as traditional banks might turn you down.

Your Credit Score Affects Your Interest Rate

Your lender may choose an interest rate based on your credit score. If your score is on the lower end, you may be considered a high-risk borrower in the eyes of the lender. In this case, the lender may charge you a higher rate to offset their risk. The higher the rate on your car loan, the more expensive the loan will be. 

Your Credit Score May Affect Your Loan Terms 

Borrowers with good credit are typically offered more favourable loan terms, such as lower monthly payments or a longer repayment term. Better terms can make your car loan easier to manage.

Pulling Your Credit Report Gives You A Chance To Spot Errors

If you pull your credit report before applying for a car loan, you’ll have a chance to review it in detail to see if it’s accurate and up-to-date. Any mistakes on your credit report could be pulling your credit score down, which could affect your car loan application. If you notice any errors, you can dispute them with the credit bureau and have them fixed before you apply for a car loan.  

How To Check Your Credit Report And Credit Scores Before Applying For A Car Loan?

In Canada, there are numerous ways you can check your credit scores and credit report. You can check your credit scores and report with:

  • The two major credit bureaus in Canada are Equifax and TransUnion
    • Note: TransUnion offers a ‘Consumer Disclosure’, which is a file that contains your credit information. Plus, credit scores are only free for consumers in Quebec,
  • Your bank
  • Third-party credit score providers:
 CostCredit ScoreCredit Report 
CompareHub logoFreeYesYesVisit Site
Borrowell logoFreeYesYesVisit Site
CreditKarma logoFreeYesYes-

How Do Car Loans Work? 

Due to their significance and the relative ease of acquiring them compared to more complex forms of financing like mortgages, car loans are one of the most common forms of debt. The good news is that car loans are actually fairly straightforward. 

With a car loan, the lender provides funds for the vehicle upfront in the form of a loan. Depending on the situation, you need a percentage of the total price of the vehicle as a down payment. The lender funds the remainder of the cost of the vehicle. 

You and the lender agree on terms, including the duration of the loan, the payment frequency and amount, and the interest rate. This contract will detail the penalties related to default, early payment, or other contractual violations. 

To repay the full loan amount plus interest, you’ll make regular installment payments to the lender. Once the term is complete, you own the car ‘free and clear’, meaning there is no lien against it. 

How Are Car Loans Different From Leasing? 

Leasing a car is similar to traditional financing. The lender may still conduct a credit check to make sure that you’ll be able to make payments. 

That said, there are some differences between financing a vehicle purchase and leasing a car:

BuyingLeasing
Money MattersCosts more upfront and monthly.Less upfront investment so you can get a pricier car.
Dealing With BillsYou can pay off a car loan to get rid of your monthly bill.Leasing results in continual payments over time. 
CommitmentGives you the ability to trade or sell your vehicle.Can be hard to get out of a leasing contract. 
Time InvestmentUnless you sell or trade, you will have the vehicle for a long time.You can upgrade your vehicle at the end of the lease term. 
Other FactorsThe value of your asset begins to depreciate. If you go over the mileage on your lease, fees will be incurred. 

Where Can You Get A Car Loan? 

There are several places where you can access a car loan. The lender you deal with will depend on a few things, including your credit score. This is just one reason why checking your credit is so important. Potential lenders include: 

Banks

Banks and major financial institutions tend to offer the best terms on their loans. As a result of lower interest, you’ll end up paying less on the loan. However, because of the competitive terms, you’re required to have a competitive credit score.  

Alternative Lenders

If you have less-than-stellar credit, working with alternative lenders might be a better option for you. Since they’re more lenient in terms of requirements, alternative lenders make it easier to access a car loan. The caveat is that these lenders tend to have higher rates of interest. 

Dealerships

In-house financing is another option for those seeking a car loan. Some dealerships have their own loan services. Depending on the size of your down payment and credit score, the loan terms can be fairly competitive. 

Often, it’s worth it to get a quote from a dealership (if they sell a car in which you’re interested). You can still get a loan elsewhere, but this way you’ll be armed with all relevant information. 

Best Car Loans In Canada

If you’re looking for vehicle financing to purchase a car, consider any of the following lenders and brokers:

AmountInterestTerm (Months)
Loans Canada Logo - Bad Credit Loans Canada$500 - $50,000Up to 46.96%12 - 84Learn more
ClutchVaries8.49% +24 - 96Learn more
Canada Drives$500 - $35,00029.99% - 46.96%9 - 60Learn more
SkyCap Financial$500 - $10,00012.99% - 39.99%9 - 36Learn more
Carloans411$5,000 - $40,000Varies12 - 72Learn more
Canada Auto Finance$5,000 - $45,0004.90 % - 29.95%36 - 72Learn more
Eden ParkVaries11.9% +12 - 84Learn more
Splash Auto Finance by RifcoUp to $50,000Varies12 - 84Learn more

Other Factors to Consider When Getting a Car Loan

In addition to your credit score, other factors should also be considered when applying for a car loan, including the following: 

Down Payment

Another important factor to consider when applying for a car loan is how much money you have to put down. The bigger your down payment, the better your chances of getting a car loan with poor credit. Even with great credit, a higher down payment can result in substantially better loan terms. 

Interest Rate

Securing the lowest possible rate on your car loan is in your best interest. This will help you save money over the life of the loan. Generally speaking, a higher credit score may afford you a lower interest rate.

To get an idea of the rate of interest for which you qualify, consider using a loan comparison platform, like Loans Canada’s CompareHub

Debt-To-Income Ratio

This factor refers to the amount of debt you currently have relative to the amount of money you earn. A low debt-to-income ratio shows that you have more money available after all your bills have been paid to put towards your car loan payments. Conversely, a higher debt-to-income ratio means that it may be more difficult for you to make car loan payments in the eyes of the lender.

Term Length

Essentially, the shorter the term, the higher your car loan payments. That’s because you have a shorter period of time within which to repay your loan. However, it also means you pay off your loan faster. 

On the other hand, a longer term means you have more time to pay off your loan, so your payments will be smaller. However, it also means you’ll likely pay more in interest over the life of the loan. 

Affordability

Consider whether the cost of the vehicle fits into your budget. In addition to your car loan payments, consider other ongoing costs, such as insurance, registration, gas, and maintenance/repairs. Be sure that you’re prepared to make those payments so you don’t risk default. 

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What Do I Need to Apply For a Car Loan?

When you apply for a car loan, you’ll need to supply the lender with specific documents as part of the application process. 

  • Driver’s license: You will need a driver’s license in order to purchase a car. Not only is it proof of your address, but it shows that you’re legally eligible to drive and own the car.
  • Insurance: In order to legally operate the vehicle, you need to have valid car insurance. Bring proof with you to get your car loan.
  • Employment proof: Lenders will want to ensure that you’re steadily employed so that you have regular income needed to cover your ongoing car loan payments. Proof of employment may come in the form of a letter from your employer or pay stubs.
  • Bank statements: These statements highlight your finances and are especially important if you are self-employed. Bring your bank statements for at least three months.

How To Get The Best Car Loan? 

In order to get the best possible car loan, you’ll need to do some research. The good news is that there are many good resources available to help you. Here are some tips to consider:

  • Comparison Shop: Use an online loan comparison platform to get an idea of the loans for which you qualify. It will give you a full picture of what you can expect moving forward.
  • Get Pre-Approved: Once you find a loan in which you are interested, the next step is to get pre-approved. This will tell you what you can afford based on the information you provide about your finances. Most of the time, you can get this done quickly and online.
  • Improve Your Credit Score: If you’re not able to find a loan that works for you because of your credit score, take steps to improve it. Consider paying down debt, making timely bill payments, and keeping your credit utilization ratio under 30%.

Final Thoughts

Getting a car loan is a fairly straightforward process, so long as you’re prepared. Before you start shopping for a vehicle, be sure to check your credit score first to see where you stand. And if you find that your score needs improvement, take the time to boost it before applying for a car loan, if possible. 

Car Loans And Credit Scores FAQs

Can I get a car loan with bad credit?

Yes, you can get a car loan with a bad credit score. Many alternative lenders accept bad credit and even no credit. In fact, some lenders don’t require a credit check at all.

Will my car loan payments affect my credit score?

Yes, in almost all cases your credit score will be impacted by your car loan payments. Regular payments can improve your credit, though defaulting will impact it negatively. Make sure you ask your lender whether they report payments to the credit bureaus or not.

Can you get in-house financing with a car dealership if you have bad credit?

Yes, many car dealerships work with consumers with bad credit. However, you may likely pay higher interest as a result.
Corrina Murdoch avatar on Loans Canada
Corrina Murdoch

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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