Car Deal Canada

Car Loan Pre-Approval Guide

Car Loan Pre-Approval Guide

Buying a car is one of the largest purchases Canadians make. With the average price of a new vehicle now over $40,000, getting approved for auto financing has never been more important.


Getting pre-approved for a car loan before visiting dealerships gives you a huge advantage. With rates and monthly payments already locked in, you can shop confidently knowing exactly what you can afford.


Pre-approvals allow you to negotiate the best possible price without worrying about financing. Dealers also know you have locked-in approval, so they will be more motivated to offer you their best deal.


This comprehensive guide to getting pre-approved for a car loan in Canada will cover everything you need to know. Follow these tips and you’ll be in the driver’s seat with strong auto financing ready for your next vehicle.

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Benefits of Pre-Approval

Getting pre-approved for an auto loan before visiting dealerships comes with several key benefits that can make financing your next car much easier.

 

Know Your Budget and Monthly Payments

Pre-approval provides you with an accurate estimate of the total loan amount, interest rate, and monthly payments a lender is willing to offer based on your credit profile and income. With pre-approval, you’ll know your exact budget range and what monthly payments you can realistically afford before falling in love with a specific vehicle.

 

Lock In Competitive Interest Rates

Interest rates fluctuate frequently, so getting pre-approved locks in a rate based on your credit score at that time. This prevents you from losing out on low rates while shopping around. Pre-approved rates are also often lower than dealer financing since lenders compete for your business.

 

Strengthen Negotiating Position

Walking into a dealership with financing already secured gives you leverage to negotiate the best possible price on your desired vehicle. Dealers know you have alternatives and are less likely to pressure you into accepting inflated rates or terms.

 

Speed Up Financing Process at Dealership

With pre-approval, the dealership simply needs to verify your information rather than submitting a full application. This streamlines the buying process so you can drive off the lot faster.

 

What is Pre-Approval?

A car loan pre-approval is when a lender reviews your credit report and financial information to determine if they will likely approve you for an auto loan in the future. Pre-approval provides an estimated loan amount, interest rate, and monthly payment you may qualify for.

Pre-approval is different from pre-qualification, which is just an initial estimate not based on your specific credit and income. With pre-approval, the lender does a hard credit check and verifies your details to decide if they will approve your actual loan application later.

While not guaranteed, a pre-approval gives you a strong indication you will be approved for a car loan in a certain amount with defined terms. This allows you to shop knowing your budget and gives you leverage when negotiating with dealerships.

 

Credit Score Needed

Your credit score is one of the most important factors lenders consider when approving car loans. In general, you’ll need a credit score of at least 650 to qualify for favorable loan terms from most lenders.

Here’s a quick overview of the credit scores needed for auto loan approval:

 

  • Excellent Credit (720+): Preferred rates and terms
  • Good Credit (650-719): Likely to be approved
  • Fair Credit (580-649): May be approved but higher rates
  • Poor Credit (Below 580): Difficulty getting approved

 

Before applying, it’s wise to check your credit report and FICO score from Equifax and TransUnion. This helps you understand where your credit stands before submitting applications.

If your score needs improvement, you may be able to boost it prior to applying by:

 

  • Paying down balances on credit cards and loans
  • Disputing and correcting errors on your credit reports
  • Becoming an authorized user on someone else’s account

 

With a higher score, you’ll have a better shot at qualifying and securing lower interest rates on your auto loan.

 

Income Requirements

Lenders want to see that your income is high enough to comfortably afford the monthly car payments. They typically look at your debt-to-income ratio, which is your total monthly debt payments divided by your gross monthly income.

To qualify for the best rates, you’ll want a ratio under 30-35%. Ratios up to 50% may still qualify, but will have higher rates.

As proof of income, lenders will require recent pay stubs, tax returns, bank statements, or a letter from your employer. Having consistent income from the same source is ideal. Things like seasonal work, recent job changes, or self-employment make getting approved more challenging.

Provide as much documentation as you can to verify your income. The more proof you have, the easier it will be to get approved and the better your chances of getting lower rates.

 

Down Payment

The ideal down payment amount for a car loan is 20% of the vehicle’s purchase price. Putting 20% down shows lenders you are financially committed and have the means to repay the loan. It also results in the best interest rates and loan terms.

However, many lenders will approve loans with less or no down payment. Here are some options for low and no down payment car loans:

 

  • 5-10% Down – Most lenders allow 5-10% down payments. Rates are slightly higher than 20% down loans.
  • Manufacturer Rebates – Some automakers offer customer cash rebates that can be applied to the down payment.
  • Trade-In Equity – Any positive equity in your trade-in vehicle can count towards the down payment.
  • Co-signer – Adding a co-signer with good credit can help qualify for $0 down.
  • Dealer Down Payment Assistance – Many dealers partner with lenders to offer in-house down payment assistance programs.
  • Personal Loans – Unsecured personal loans can provide funds for a car down payment when you have insufficient savings.

 

While $0 down car loans are advertised, they often carry higher interest rates and are riskier for borrowers. Even a small down payment of a few thousand dollars can secure better loan terms. Evaluate all options to determine the right down payment for your budget and needs.

 

Where to Apply for Pre-Approval

You have several options when it comes to where to apply for auto loan pre-approval in Canada:

Banks

Major banks like RBC, TD, Scotiabank, CIBC, and BMO all offer car loan pre-approvals. As established lenders, banks can provide competitive interest rates and flexible terms. The pre-approval process may require visiting a branch and meeting with a financial advisor. Banks will evaluate your income, debts, credit score and down payment when considering your application.

 

Credit Unions

Local credit unions are another source for pre-approval. Credit unions are member-owned cooperatives that often offer personalized service and competitive rates. The pre-approval process is similar to banks – you’ll need to provide documents verifying income and creditworthiness. Credit unions may be more willing to work with those who have less-than-perfect credit.

 

Online Lenders

Many online lenders like Canada Drives allow you to get pre-approved for an auto loan entirely online. The application process is fast, easy, and can be completed on your phone, tablet or computer in minutes. Online lenders use technology to provide quick decisions and funding. This makes them an option if you need a pre-approval faster. Rates from online lenders may be higher than banks or credit unions.

 

Dealerships

You can also get pre-approved directly through the dealership you are purchasing from. The dealer will submit your application to lenders they work with. While convenient, this gives you less ability to compare rates and terms across multiple lenders. Dealer financing may be best for those with credit challenges who need the dealer to advocate on their behalf.

 

Documents Needed for Pre-Approval

When applying for auto loan pre-approval, you’ll need to provide documentation to verify your identity, income, and down payment funds. Having these ready in advance will help speed up the process.

 

Proof of Income

Lenders will want to see proof that you have sufficient income to make the monthly car payments. Acceptable documents include recent pay stubs, bank statements showing direct deposit amounts, an employment letter, or copies of tax returns if self-employed.

 

Credit Report

In most cases the lender will pull your credit report directly. However, getting a copy of your own credit report ahead of time allows you to review your credit score and check for any errors that need correcting.

 

Identification

Valid government-issued ID is required, such as a driver’s license, passport, or permanent resident card. Provide a copy of your ID when applying for pre-approval.

 

Down Payment Proof

You’ll need to show statements demonstrating you have funds saved for the down payment. This can include recent bank statements, an investment portfolio, or documentation of other assets you plan to use for the down payment.

 

Getting Approved Fast

If your credit score is on the lower end, there are some strategies you can use to boost your chances of getting approved quickly for a car loan:

 

Boost Your Credit Score

First, check your credit report for any errors that may be negatively impacting your score. Dispute any inaccurate information to get it removed. Pay down credit card balances to lower your credit utilization ratio. Avoid applying for new credit ahead of your auto loan application.

 

Add a Cosigner

Asking a family member or friend with good credit to co-sign your auto loan can help you qualify and get better rates. Their income and credit history will be factored in by the lender. Just be sure the co-signer understands they’ll be equally responsible for repaying the loan.

 

Prepare Documents in Advance

To speed up the approval process, have your required paperwork ready. This includes proof of income like recent pay stubs, tax documents, and bank statements. Make sure all your identification documents are current. With all your paperwork organized ahead of time, the pre-approval process will go faster.

 

Comparing Loan Offers

When you apply for pre-approval, you’ll likely receive loan offers from multiple lenders. It’s important to compare these offers side-by-side to find the best loan for your needs. Here are some key factors to look at when reviewing and comparing pre-approved auto loan offers:

 

Interest Rates

The interest rate is one of the most important considerations, as it greatly impacts the total cost of your loan. Compare the annual percentage rates (APRs) across lenders – even a small difference of 0.5% can add hundreds of dollars in interest costs over the loan term.

 

Loan Terms

Loan terms typically range from 24 to 84 months for a car loan. Longer terms (6-7 years) mean lower monthly payments but more interest paid over time. Carefully weigh the tradeoffs of shorter terms with higher payments versus longer terms with more interest costs.

 

Fees

Look for any fees that may be charged for processing, origination, documentation, or early repayment. Ideally you want a lender that charges minimal fees. Watch out for prepayment penalties if you think you may pay off the loan early.

Doing an apples-to-apples comparison of loan offers takes a bit of work, but can save you hundreds or thousands over the life of the loan. Don’t just look at monthly payments – calculate the total interest costs for each option as well.

 

Pre-Approval vs Dealer Financing

One of the biggest decisions when getting a car loan is whether to get pre-approved from a lender first or go straight to dealer financing. Both options have pros and cons to weigh.

The main benefits of getting pre-approved are:

 

  • You can shop around for the best rates and terms across multiple lenders
  • Pre-approval locks in an interest rate, so you’re protected if rates rise later
  • You have concrete loan terms to reference when negotiating with the dealer
  • Less time spent financing at the dealership since approval is already handled

 

However, there are some advantages to using dealer financing as well:

 

  • Dealers may run special financing promotions not offered by banks/credit unions
  • Dealer financing representatives can explain all the loan term options
  • Dealers handle the loan application process for you
  • Dealer financing may be quicker if you have not been pre-approved

 

Overall, pre-approvals give buyers more control and negotiating power. But dealer financing can also be convenient if you are short on time. Evaluate both options before deciding what works best for your auto purchase.

 

Using Pre-Approval at Dealership

Once you have a pre-approved car loan in hand, it’s time to head to the dealership. Here are some tips for leveraging your pre-approval to negotiate the best deal:

 

Negotiate from a Position of Strength

Walk into the dealership knowing your budget, ideal monthly payment, interest rate, and loan terms. With pre-approval, you hold the leverage in financing negotiations. Make it clear you already have financing lined up so the focus can be on the vehicle price and add-ons.

If the dealer offers you a better interest rate or monthly payment, be sure to get it in writing before agreeing to use their financing. Never let your guard down and get upsold into a more expensive loan.

 

Avoid Unnecessary Add-ons and Upsells

With pre-approval, the dealer’s finance manager has limited ability to markup your interest rate or tack on extras. Politely decline all loan add-ons like extended warranties, protection packages, and prepaid maintenance plans.

Also be wary of dealers trying to get you into a more expensive vehicle. Stick to your predetermined budget and don’t take the bait when they try to upsell you into a pricier car or trim level.

By securing financing beforehand, you remove many opportunities for dealerships to inflate the transaction and maximize their profit.

 

After Getting Pre-Approved

Once you receive your pre-approval letter, it’s time to start shopping for cars. Your pre-approval will be good for 30-60 days, giving you a decent window to find the right vehicle. Focus your search on cars that fall within your approved loan amount and monthly payment. Bring your pre-approval letter with you to the dealership so you have proof of your budget and terms.

When you’ve selected the car you want, the final step is finalizing the loan. The dealer will need to verify all the details in your application and submit it to the lender for a final credit check and approval. As long as your financial situation hasn’t changed, you should be able to get the same loan terms outlined in your pre-approval. The dealer may try to get you to finance through them instead, but stick to your pre-approved loan if the terms are better.

Within a day or two of submitting the final paperwork, the loan should be fully approved. The lender will then wire the money directly to the dealer, allowing you to drive your new car home! With the pre-approval process complete, you’ve secured financing that fits your budget on your terms.

 

Conclusion

Getting pre-approved for an auto loan before visiting dealerships makes the car buying process much smoother. By taking the time upfront to check your credit, research lenders, and submit a loan application, you can enjoy several key benefits:

 

  • Know your budget, interest rate, and monthly payments
  • Gain leverage negotiating with dealerships
  • Lock in competitive market rates
  • Speed up the approval process at the dealership
  • Shop with confidence and avoid financing surprises

 

Following the steps in this guide will set you up for financing success. With a pre-approved auto loan in hand, you can focus your negotiations on the purchase price and features you want, not financing terms. Take control of the process by getting pre-approved today.

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Questions About Getting Pre-Approved for a Car Loan in Canada

To get pre-approved for a car loan in Canada, most lenders require a minimum credit score of 650. Some may approve scores as low as 600, but you’ll likely get better rates with a score of 700 or higher. The higher your credit score, the more likely you are to get approved and the better loan terms you can qualify for.

The main documents you’ll need for a car loan pre-approval in Canada are:

 

– Proof of income – Recent pay stubs, T4s, Notice of Assessment

– Government ID – Driver’s license, passport

– Proof of address – Utility bill, bank statement

– List of assets and liabilities – Details of things you own and owe money on

 

Having these documents ready will help speed up the pre-approval process and show lenders you are financially responsible.

 

It typically takes 1-3 business days to get pre-approved for a car loan in Canada. Applying online is the quickest option, as you can submit all required documents electronically. Going to a bank or dealership in person may add a few more days for processing and review. Same day pre-approvals are sometimes possible for those with exceptional credit and straightforward financial situations.

There are several options for getting pre-approved for a car loan in Canada:

 

– Your bank or credit union

– Online lenders like Canada Drives or LoanConnect

– The dealership where you plan to purchase the car

– An auto finance broker

 

Banks often offer discounted rates for existing customers. Online lenders promote fast approvals. Dealers arrange financing but may encourage add-ons. Brokers search multiple lenders for your best deal.

 

Benefits of getting pre-approved for a car loan in Canada include:

 

– Knowing your budget and max affordable payment in advance

– Having negotiating power for better interest rates and terms

– Streamlining the dealership process by having financing ready

– Option to shop for cars you are confident you can afford

– Less risk of impacting your credit score through multiple applications

 

Overall, pre-approval gives you financial certainty and sets you up for car buying success.

Getting pre-approved for a car loan involves a hard credit check, which can cause a small, temporary drop in your credit score. However, as long as you limit applications to a couple lenders, the impact should be under 10 points and disappear in a few months as you build more positive credit history. Too many hard checks can be seen as high risk by scoring models.

 

The amount you can get pre-approved to finance on a car loan typically ranges from $5,000 up to $150,000, depending on factors like:

 

– Your income and expenses

– Credit score and history

– Current debt obligations

– Down payment amount

– Value of the car you’re purchasing

 

Lenders will approve you for a monthly payment you can reasonably afford based on a thorough review of your finances during the pre-approval process.

Pre-approvals from both banks and dealerships have advantages in Canada:

 

Banks: Better rates for existing customers; not trying to sell you a car

 

Dealers: One-stop shop for car and financing; potential coordination incentives

 

Consider your options. If you have a strong credit history and relationship with a bank, start there. Otherwise a dealership pre-approval can simplify the buying experience.

With a good credit score between 700 and 850, you can expect to qualify for the lowest rates on a pre-approved car loan in Canada, which currently average:

 

– New car: 3-5%

– Used car: 4-8%

 

Leasing, terms under 2 years, and luxury vehicles may be at the higher end. Getting pre-approved locks in competitive market rates and sets you up for significant interest savings over the loan term versus financing with poor credit.

Tips to improve your chances of getting approved for a Canadian car loan:

 

– Maintain a credit score over 650

– Keep credit card balances low

– Pay all bills on time

– Provide steady income verification

– Make a 20% down payment if possible

– Consider a co-signer if your credit is limited

– Shop within an affordable monthly payment

 

Meeting these criteria shows lenders you are financially responsible and ready for auto financing.

Yes, you can get pre-approved for a car loan in Canada if you are self-employed. Key requirements are:

 

– 2+ years running your business

– Proof of steady income from business bank statements

– Good personal credit history

– 20%+ down payment

 

Being transparent about your financial situation will boost your chances significantly. A solid down payment also shows lenders you’re invested in repaying the loan.

While 0 down car loans exist, the typical down payment required by Canadian lenders for approval on good terms is:

 

– New car: 5-10%

– Used car: 10-20%

 

Larger down payments give lenders more assurance you can repay the loan. Putting 20% or more down signals you are financially stable and secures better interest rates.

 

It is possible to get approved for a car loan in Canada while receiving EI or social assistance, but more challenging. To improve your chances:

 

– Highlight other income sources if applicable

– Provide paperwork showing regular benefit payments

– Make a large down payment from savings

– Bring a co-signer with strong credit

– Consider financing an older, lower-cost used vehicle

 

Overcoming temporary income concerns convinces lenders of your ability to manage payments.

When budgeting for a car loan, be sure to account for these added expenses:

 

– Interest charges

– Sales tax

– Registration and title transfer fees

– Auto insurance payments

– Regular maintenance costs

– Fuel estimates

– Potential repair costs

 

Looking at the full cost picture, not just the monthly principal and interest payment, ensures making a car payment is sustainable for your finances.

To get the best interest rate possible on a pre-approved Canadian car loan:

 

– Have a credit score over 720

– Apply with 2-3 lenders to compare rates

– Negotiate using other loan offers as leverage

– Opt for a shorter loan term length

– Make a down payment of 20% or more

– Enroll in automatic payments from your bank account

 

Rates under 5% are achievable through smart pre-approval methods and exceptional financial credentials.

Currently, the average interest rate for a 3-year used car loan in Canada among applicants with good credit scores is 5.99%. For a 5-year loan term, rates average 7.50%. Older used cars, high mileage, and poor credit can expect rates of 10-20% or denial.

 

Shopping among multiple lenders and negotiating with pre-approval leverage can help secure the most competitive rate for your situation.

As a general rule, you can afford a car equal to 50% of your gross annual income if purchasing and 20% of your income if leasing in Canada. This ensures manageability of the loan payment as well as other ownership costs in your budget.

 

Use an auto loan calculator to estimate payments on loan amounts you are considering. The payment should be under 10-15% of your monthly take-home income to prevent financial strain.

Paying off your Canadian car loan early can save you significant money on interest charges over the loan term. It also frees up cash flow going forward once the loan is paid. Consider making extra principal payments to pay off a car at least 2 years early.

 

Be sure to check for early repayment penalties from your lender first. Also maintain savings and emergency funds before prioritizing debt repayment.

If you don’t qualify for a traditional Canadian car loan, some alternatives to consider are:

 

– Subprime financing at higher interest rates

– Applying with a co-signer who has better credit

– Crowdfunded auto loans peer-to-peer

– Dealership in-house financing option

– Buying a less expensive used car with cash

– Trying a lease option requiring lower approval credit

 

Avoid extremely high-rate subprime loans over 20% interest that make paying off the principal very difficult.

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