How to Improve Your Chances of Getting Approved for a Car Loan

Getting approved for a car loan isn’t only about finding the right vehicle. A lender also needs to determine whether you are likely to repay the money you borrow.

Your credit history, income, existing debts, down payment and the vehicle itself can all affect a financing decision.

What Do Lenders Look at When You Apply for a Car Loan?

Every lender has its own approval requirements, but lenders generally want to understand two things:

Can you afford the loan?

and

How likely are you to repay it as agreed?

To answer those questions, a lender may consider factors including:

• Credit history
• Credit score
• Income
• Employment history
• Existing monthly debt payments
• Amount being financed
• Down payment
• Loan term
• Vehicle age and value

A stronger application doesn’t necessarily depend on one individual factor. Lenders look at the overall risk associated with the loan.

Check Your Credit Before Applying

One of the first things to do before applying for a car loan is review your credit.

Your credit report contains information about your borrowing history, including existing credit accounts and payment history.

Checking it in advance gives you an opportunity to identify incorrect information and understand what a lender may see when reviewing your application.

If there are errors on your credit report, dealing with them before applying for financing can prevent incorrect information from affecting your application.

Pay Your Bills on Time

Payment history is an important part of your credit profile.

Repeatedly missing payments on credit cards, loans or other accounts may make lenders more cautious about extending additional credit.

If you are planning to apply for vehicle financing in the coming months, continue making all existing payments by their due dates.

Building stronger credit usually takes time, so this is something that is better addressed before you arrive at a dealership.

Reduce Existing Debt Where Possible

Lenders don’t only look at how much money you earn.

They also consider how much of that income is already committed to other debt payments.

If you have significant balances on credit cards, personal loans, lines of credit or other obligations, taking on another monthly payment may be more difficult.

Paying down existing debts can reduce your monthly obligations and may strengthen your overall borrowing profile.

You don’t necessarily need to eliminate every debt before financing a vehicle, but reducing high balances may help.

Save a Larger Down Payment

A down payment reduces the amount you need to borrow.

For example, if a vehicle costs $35,000 and you put $5,000 down, you only need financing for the remaining amount plus applicable taxes and fees that are included in the loan.

A larger down payment may:

• Reduce the amount financed
• Lower your monthly payments
• Reduce total interest
• Reduce the lender’s exposure
• Help limit negative equity

A down payment can be particularly useful when you are trying to keep your loan amount reasonable relative to your income.

Choose a Vehicle You Can Afford

One of the simplest ways to improve a car loan application is to avoid applying for substantially more financing than your budget can support.

A lender may be comfortable approving you for a $25,000 vehicle but not a $55,000 vehicle.

Before shopping, determine what monthly payment comfortably fits your budget.

Then work backwards to determine an appropriate vehicle price.

Remember to include other vehicle expenses such as:

• Insurance
• Fuel
• Maintenance
• Repairs
• Registration
• Parking

The Government of Canada recommends considering the total cost of vehicle ownership rather than looking only at the loan payment.

Consider a Shorter Loan Term

Longer loan terms can make an expensive vehicle appear affordable because they spread the balance across more monthly payments.

But stretching a loan over seven or eight years can substantially increase the amount of interest paid.

See the five-year versus eight-year car loan comparison for a worked example of monthly payments and total interest.

It may also increase the risk of owing more on the loan than the vehicle is worth.

Choosing a more affordable vehicle with a reasonable financing term can produce a stronger overall financial position than simply extending the loan until the monthly payment fits your budget.

Keep Your Employment and Income Information Ready

Lenders may ask you to verify your employment or income.

Having accurate information available can help avoid unnecessary delays during the application process.

Depending on the lender and your employment situation, you may be asked for information such as:

• Employer name
• Employment history
• Income
• Recent pay information
• Banking information
• Proof of address

Self-employed applicants may be asked for different documentation.

The exact requirements vary by lender.

Avoid Applying for More Credit Than You Need

Opening several new credit accounts immediately before applying for a major loan may complicate your borrowing picture.

If you know you plan to finance a vehicle soon, consider whether you really need to open additional credit cards or take on other loans at the same time.

The goal is to present a clear picture of manageable borrowing.

Ask About Pre-Qualification or Pre-Approval

Before choosing a vehicle, ask a lender whether it can assess your borrowing options in advance. Confirm whether the result is an estimate or an approval, whether a credit check is required, how long the result remains valid and what conditions still need to be met. As RBC explains about car loan pre-qualification, pre-qualification does not guarantee approval when you formally apply.

Comparing car loan offers is different from opening unrelated credit accounts. The Financial Consumer Agency of Canada advises gathering car loan quotes within a two-week period so credit bureaus treat these checks as one inquiry. Ask each lender what kind of credit check it will make.

Consider Whether a Co-Signer Makes Sense

In some situations, a lender may allow another person to co-sign a vehicle loan.

A co-signer shares responsibility for the debt.

This can potentially help an applicant qualify when their own credit or income does not meet the lender’s requirements.

However, co-signing is a significant financial commitment. If the primary borrower fails to make the required payments, the co-signer can be responsible for the debt.

The federal Office of Consumer Affairs recommends carefully considering how co-signing may affect both people financially.

Compare Car Loan Offers

Approval is only one part of the process.

You also want financing with terms that make sense.

Car loans may be arranged through a dealership, bank, credit union or independent financing company.

When comparing offers, look at:

• Interest rate
• Length of the loan
• Monthly payment
• Financing fees
• Early repayment terms
• Total borrowing cost
• Total amount you will repay

Don’t assume the first approval is automatically your best option.

The Financial Consumer Agency of Canada recommends getting quotes from multiple dealers or lenders and comparing the total financing cost.

Can You Get a Car Loan With Bad Credit?

It may still be possible to qualify for vehicle financing with poor or limited credit, but your available options and borrowing costs may be different.

A lender may offer:

• A higher interest rate
• A lower maximum loan amount
• Different loan terms
• A requirement for a larger down payment
• A requirement for a co-signer

If the financing offered is expensive, consider whether purchasing a less expensive vehicle or spending additional time improving your credit could put you in a better position.

Getting approved shouldn’t be the only objective.

You also want a loan you can comfortably repay.

Prepare Before You Apply for a Car Loan

You don’t need perfect credit to apply for vehicle financing, but preparation can make a difference.

Before applying:

• Review your credit
• Make existing payments on time
• Reduce debt where possible
• Build a down payment
• Choose a realistic vehicle budget
• Gather your income information
• Compare multiple financing options

Most importantly, look at the total cost of the car loan, not simply whether the monthly payment fits.

A vehicle that costs a little less — combined with a larger down payment and a shorter financing term — can sometimes put you in a much stronger financial position than stretching a larger loan over many years.