Car Loans 101: Check Your Credit Score First

Written by Corrina Murdoch
Fact-checked by Caitlin Wood

Car Loans 101: Check Your Credit Score First

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Car Car Loan Credit Rating Credit Score

Before you start shopping for a new car and a new loan to pay for it, you need to check your credit score. You’ve heard it before and you know it’s the right thing to do so why do most people still forget to check?

It’s one of the biggest mistakes people who are looking to buy a car make; the average person typically looks for the car they want then after they have their heart set on a certain model, decide to check their credit score.

If you are currently looking to purchase a new vehicle, stop right now and go check your credit score. This way you’ll have a better idea of what kind of car you can realistically afford and won’t be disappointed when you can’t get your dream car right away.

Checking Your Credit Report and Credit Score

In Canada, if you want to check your credit score direct with one of the two major credit bureaus, you’ll pay roughly $10 for it. You can however get your credit report for free, but if you’re in the process of looking for a new car we suggest that you pay the $10 and get your credit score as well. Here’s all the information you need to request your credit report and score by both telephone and mail.

Online

• Equifax online credit report portal
• TransUnion online credit report portal

By Phone

• Equifax number is 1-800-465-7166
• TransUnion number is 1-800-663-9980 or 1-877-713-3393 for those living in Quebec

By Mail

• The Equifax credit report request form
• The TransUnion credit report request form

How Do Car Loans Work? 

Car loans are one of the most common kinds of debt, considering their importance and the relative ease of accessing this type of loan compared to other more complicated types of financing, for example, a mortgage. The good news is that car loans are actually fairly straightforward. 

What is a Car Loan? 

A car loan is a secured form of debt where the collateral for the loan is the car itself. With a car loan, you are the legal owner of the vehicle, though are still in debt to the lender for the amount of money you borrowed. 

How Does a Car Loan Work?

The lender provides funds for the vehicle upfront in the form of a loan. Depending on the situation, you need to provide a percentage of the total price of the vehicle as a downpayment. 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, as well as the interest rate. This same contract will detail the penalties related to default, early payment, or other contractual violations. You make routine payments to the lender; and, 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? 

Where Can You Get a Car Loan? 

There are several places where you can access a car loan. Depending on your financial situation and credit score, you will need to approach a different lender. This is just one reason why checking your credit is so important. Potential lenders include: 

• Banks: Usually the most desirable option, banks and major financial institutions tend to offer the best terms on their loans. This means that you will, as a result of lower interest, end up paying less on the loan itself. However, because of the competitive terms, you are required to have a competitive credit score.  
• Alternative Lenders: Another approach that suits those with less-than-excellent credit are alternative lenders. Tending to be 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 situation, the size of the down payment, and many other factors, 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 are armed with all relevant information. 

Best Car Loans in Canada

	Amount	Interest	Term(Months)
	$500 - $50,000	Up to 46.96%	12 - 84	Learn More
	$500 - $35,000	$29.99% – 46.96%	9 - 60	Learn more
	$500 – $10,000	12.99% – 39.99%	9 - 36	Learn more
	$5,000 - $40,000	Varies	12 - 72	Learn more
	$7500 - $59,995	3.95% +	12 -96	Learn more
	$5,000 - $45,000	4.90 % - 29.95%	36 - 72	Learn more
	Varies	11.9% +	12 - 84	Learn more
	Up to $50,000	Varies	12 - 84	Learn more

Factors to Consider When Getting a Car Loan

When getting a car loan, there are a few really important things to keep your eye on. These include: 

Credit Score

Your credit score is a reflection of your borrowing history and gives lenders an idea of the amount of risk you pose as a borrower. It directly impacts the rates for which you are eligible and whether you actually qualify for a loan. You should check your credit score prior to applying for a loan in order to get a better idea of where you stand. While you can get a car loan with most credit scores (even poor ones), it drastically limits the lenders with whom you can work. Those with good credit or better can get the best possible terms on a loan. 

Down Payment

Another important factor to consider when applying for a car loan is how much money you have to put down. The more you have to put down, 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. 

Find out if you can get a no down payment car loan. 

Interest Rate

Use a loan comparison platform to get an idea of the rate of interest for which you qualify. Naturally, the lower the interest rate, the less money you will pay for the vehicle itself. 

Check out what the average car loan interest rate is in Canada.

Debt-to-Income Ratio

This factor refers to the amount of debt you currently have relative to the amount of money you bring in. A low debt-to-income ratio shows that you will more easily be able to make regular payments. Conversely, a higher debt to income ratio showcases that it will be more difficult for you to make said payments.

Term Length

Essentially, the shorter the term, the higher the payments. However, it means you pay off your loan faster. On the other hand, a longer-term means you have the loan in your name for more time, though you pay less each month. 

Find out what is the average car loan payment in Canada.

Affordability

Finally, consider whether the cost of the vehicle fits into your budget. Vehicles cost more than regular loan payments. Real cost includes insurance, registration, gas, and repairs. Be sure that you are prepared to make those payments so you don’t risk default.

What Do I Need to Apply For a Car Loan?

To apply for a car loan, there are a few things you need to prepare. When you have all of your documentation and information together, the process of actually getting the loan is much smoother. 

Factors That Affect Your Eligibility 

• Credit score: Your credit score highlights your history as a borrower. The higher your credit score, the more eligible you are for a car loan. 
• Income: Showing that you have regular income is important to a lender since it tells them that you can make the payments going forward. Naturally, the higher your income, the better the loan terms. 
• Debt: While most everyone has some form of debt or other, the more you have, the less eligible you are for car loans. If debt is an issue, consider paying some of it down so as to improve your debt-to-income ratio. 
• Employment stability: Reflected in your employment history, being able to show a lender that you have been steadily employed shows a reliable pattern of behaviour. It means that you are less of a risk since you are deemed less likely to lose your job if you’ve been there for a while. 
• Down payment: This is the amount of money you have to offer upfront. The higher the down payment, the smaller the loan you’ll require. It can also help you access more competitive terms on your loan. 

Documents Needed When Applying

• 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 are 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: Most often coming in the form of pay stubs, this tells the lender that you are steadily employed and that you have a regular income. Have your last three month’s worth of pay stubs ready. 
• Bank statements: This is a helpful way to highlight your finances and is 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 in your pursuit of amenable loan terms. It’s easy to get started. 

• Compare and Research: Use a well-reputed 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-approval. Most of the time, you can get this done quickly and online.
• Improve your credit score: If you are not able to, at present, find a loan that works for you, the key is to improve your credit score. Consider paying down debt, especially that with a higher rate of interest. If you don’t have established credit, there are resources like secured credit cards to assist you in building your profile. 

Final Thoughts

Accessing a car loan is a fairly straightforward process, so long as you are prepared. Do your research, keep an eye on your credit score, and take steps to improve your financial standing, you can access competitive loan terms. By checking your credit score first, you will be armed with the information needed to find the right car loan.