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What Credit Score is Required For a Car Loan in Canada

What Credit Score is Required For a Car Loan in Canada

Getting the keys to your new ride is an exciting milestone. But for many buyers, anxiety over qualifying for financing can put a damper on the car shopping experience. This is especially true if you have bad credit or a limited credit history.


While there’s no universal minimum credit score required to get approved, your score plays a big role in determining the interest rate and terms lenders will offer. Understanding how it’s calculated and how to optimize it can save you money and hassle when financing your next vehicle.


This guide explains what credit scores are, ideal ranges for auto loans, and most importantly, tips to improve your rating. Because even if your credit needs work, focusing on boosting your score along with considering specialized financing means your dream car can still be within reach.



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Definition of Credit Scores

Your credit score represents your creditworthiness and ability to repay debt. It’s calculated based on information in your credit report, which details your borrowing and payment history. The most common credit scoring models used in Canada are:

 

  • FICO Score – Developed by Fair Isaac Corporation, this is the most widely used model. FICO scores range from 300 to 900.
  • VantageScore – Created by the three major credit bureaus as an alternative to FICO. VantageScores also range from 300 to 900.
  • TransUnion Score – TransUnion’s proprietary scoring model, ranging from 300 to 850.
  • Equifax Score – Equifax’s own model, with scores between 280 and 900.

 

In general, the higher your credit score, the lower lending risk you represent to financial institutions. While each model uses a different scale, scores above 700 are considered excellent credit, and will qualify you for the best loan terms. Scores below 600 are viewed as poor credit risk.

 

Why Your Credit Score Matters for Auto Loans

Your credit score is one of the most important factors lenders consider when you apply for an auto loan. Creditors use credit scores to evaluate your creditworthiness and predict the likelihood you’ll repay the loan on time and in full.

In general, the higher your credit score, the lower the risk you pose to a lender. People with excellent credit tend to get approved for bigger loans with lower interest rates, more flexible terms, and better incentives like rebates. Those with poor credit scores are seen as riskier borrowers, so lenders will either deny the application or offer less favorable loan terms like higher interest rates or requiring a larger down payment.

So your credit score can directly impact not only whether you’ll qualify for an auto loan, but also the interest rate, loan length, down payment amount, and other conditions. Having an excellent score in the 700s or above will ensure you get the best possible deal from lenders. But even people with fair or average credit can still get approved by shopping around for a subprime lender willing to work with them.

 

Ideal Credit Score Ranges For Car Loans

When applying for a car loan, your credit score plays a major role in determining the interest rate and terms you’ll qualify for. Generally, scores are grouped into ranges that indicate your creditworthiness to lenders.

Prime borrowers have credit scores of 661 or higher. This group gets approved for the very best interest rates, often below 5% APR on new car loans and under 6% on used. With strong credit, you’ll likely qualify for longer loan terms up to 84 months, lower down payments, and better incentives from dealers.

Non-prime borrowers have credit scores between 601 to 660. While still considered fair credit, interest rates are higher compared to prime borrowers. You may pay over 10% APR depending on factors like your income, existing debts, and down payment amount. Loan terms may be shorter and down payments larger to offset the higher lending risk.

Subprime borrowers have credit scores ranging from 300 to 600. With poor credit, you will pay the highest interest rates and steepest fees. But subprime buyers can still qualify for financing, especially through special lending programs. Interest rates can exceed 20% APR, with shorter 24 to 36 month terms and down payments of 20% or more required.

So while there is no minimum score required, aiming for 661 or higher will put you in the prime borrower range and optimize your chances of qualifying for the best rates.

 

How Dealers And Lenders Evaluate Your Application

Lenders don’t just look at your credit score – they consider your entire financial picture when evaluating a car loan application. Here are some key factors beyond your credit score that impact approval:

 

  • Income – Lenders want to see you have enough steady income to make the monthly payments. Pay stubs or tax returns help verify this.
  • Existing debts – Too many outstanding loans or high balances on credit cards may raise concerns about taking on more debt. Your debt-to-income ratio is important.
  • Down payment amount – A higher down payment signals you’re invested in the loan and lowers the amount financed.

 

That’s why it’s so important to provide supporting documents when you apply for a car loan. Pay stubs, tax returns, a list of debts, proof of insurance, and your down payment source all help paint a full picture for the lender. It shows them you are a trustworthy borrower who can realistically afford the vehicle.

You can also improve your chances by getting pre-approved before shopping for a car. Pre-approval involves completing a full loan application upfront instead of at the dealership. This demonstrates to dealers that you are a serious, qualified buyer ready to purchase.

 

Tips for Improving Your Credit Score

If your credit score is on the lower end, taking steps to improve it can help you get approved for an auto loan and secure a better interest rate. Here are some effective ways to boost your credit score over time:

 

Make All Payments on Time

Payment history makes up a significant portion of your credit score. When you pay all your bills by the due date, it demonstrates you can responsibly manage credit. Even being just 30 days late on a payment can drop your score dramatically. Set up automatic payments or calendar reminders to avoid missed or late payments.

 

Lower Your Credit Utilization

This refers to how much of your available credit you are using. Experts recommend keeping your credit utilization below 30%. One way to lower it is paying down balances, especially on credit cards. You can also ask for a higher credit limit. Just be sure to maintain financial discipline and avoid running up higher balances.

 

Limit New Credit Applications

Each application for new credit initially causes a small drop in your score. Apply only for the credit you truly need. Too many new accounts in a short period can signify higher risk to lenders. Space out applications by at least six months to avoid unnecessary dings.

 

Dispute Any Errors on Your Credit Report

Incorrect information on your credit report can unfairly lower your score. Review all three of your credit reports closely. If you find any errors, submit dispute letters to the bureaus. They are required to investigate within 30 days. Removing errors can give your score a boost.

 

Financing Options for Lower Scores

If your credit score is below 600, you may think it’s impossible to get approved for an auto loan. But there are specialized financing options to help borrowers with poor credit or no credit history purchase a vehicle:

 

Down Payment Assistance Programs

Some nonprofit organizations and even dealerships offer down payment assistance programs for low-income buyers. These programs provide grants or low-interest loans to cover your down payment, which makes getting approved more attainable.

 

Secured Auto Loans

With a secured auto loan, you provide an asset like cash or investments as collateral for the loan. This lowers the lender’s risk, making it easier to get approved even with bad credit. Just be prepared to forfeit the collateral if you default.

 

Buy Here Pay Here (BHPH) Dealers

BHPH dealerships finance vehicles in-house for buyers with poor credit. They typically charge higher interest rates and require weekly or bi-weekly payments. The dealer can repossess the car if you miss payments, so be cautious with BHPH financing.

 

Getting a Co-Signer

Adding a co-signer with good credit can improve your chances of getting approved and lower your interest rate. Just remember, they’ll be equally responsible for repaying the loan if you can’t make the payments.

While financing options exist for lower credit scores, taking steps to improve your credit first can help you qualify for better terms. But even if your credit needs work, focusing on improving it and exploring specialized financing means you can still get the vehicle you need.

 

Shopping Around for the Best Rates

When getting pre-approved for an auto loan, it pays to shop around and compare offers from different lenders. Rates and terms can vary quite a bit between banks, credit unions, and dealership financing. Just a small difference in APR can mean thousands of dollars in savings over the life of your loan.

Don’t just look at the interest rate – also compare the loan term options, fees, and any prepayment penalties. Get pre-approved offers from 3-5 lenders before starting your car search. This allows you to negotiate from a position of strength with the dealer’s financing department.

Online lenders like Capital One, Lightstream, and PenFed often have very competitive rates. But don’t overlook local banks and credit unions, which may offer better terms for existing customers. Credit unions in particular are known for great auto loan rates.

Dealer financing can sometimes match or beat outside offers, especially if they are running a promotional interest rate. But this usually requires very strong credit. Always compare any dealer financing to your pre-approvals to ensure you are getting the best possible rate.

 

Should You Buy New or Used?

When shopping for a car, one of the biggest decisions is whether to buy new or used. Each option has its own pros and cons that can impact your auto loan terms and rates.

Buying new has some key advantages:

 

 

However, new cars also have downsides:

 

  • Much higher sticker price than used models
  • Steep depreciation as soon as driven off the lot
  • Often requires larger down payment and longer loan term
  • Higher sales tax based on full purchase price
  • Higher insurance premiums due to higher value

 

In contrast, buying used provides advantages like:

 

  • Significantly lower purchase price for same model
  • Faster equity build up and lower sales tax
  • Shorter loan terms available
  • Certified pre-owned still includes some warranty
  • Lower insurance costs

 

But used cars have potential drawbacks including:

 

  • Unknown maintenance history and previous damage
  • Out of factory warranty coverage
  • Fewer tech features on older models
  • Less customization options
  • May need repairs and higher maintenance costs

 

In general, buying new often requires very good credit and higher income to qualify for the larger loan amount. Used cars provide more flexibility for buyers on a budget or with lower credit scores. But shop around for both, since used car interest rates are usually a bit higher. Compare all the long-term costs and benefits for your situation to decide if new or used is the better deal.

 

Considerations for Private Car Sales

Buying from a private seller instead of a dealership can sometimes get you a better deal, but it requires more effort on your part to secure financing and ensure you’re getting a quality vehicle. Here are some tips for going the private sale route:

Financing Options:

 

  • Cash – Paying in full with cash you have on hand is simplest. But make sure to get the title signed over.
  • Personal loan – Banks and credit unions may offer auto loans you can use to pay a private seller.
  • Dealer financing – Some dealers will fund a loan for buying a used car from a private seller.
  • Payment plan – You may be able to work out installments directly with the seller.

 

What to Watch Out For:

 

  • Scams – Be wary of too-good-to-be-true deals. Verify the seller’s identity and ownership of the vehicle.
  • As-is sales – Used cars from private sellers are generally sold as-is. Know what you’re getting.
  • Mechanical issues – Have a mechanic inspect any used vehicle before purchase.
  • Title issues – Make sure the title is clear and can be transferred to you.

 

Taking some precautions can help ensure you don’t get stuck with a lemon or worse when buying privately. But you can score an affordable, quality used car this way if you’re thorough and patient in your search.

 

Understanding Car Loan Terms

When financing a car purchase, it’s important to understand the key terms and calculations that make up your auto loan. This ensures you know exactly what you’re agreeing to when signing the contract. Some key terms to understand include:

 

Loan Amount

The loan amount is the total principal you are borrowing to pay for the vehicle. This will be reduced through your payments over the life of the loan.

 

Interest Rate

The interest rate is expressed as an annual percentage rate (APR) and determines how much interest you will pay on the loan. Lower credit scores mean higher interest rates.

 

Loan Term

The loan term is the number of months given to repay the loan. Common terms are 24, 36, 48, 60 and 72 months. Longer terms mean lower monthly payments but more interest paid over time.

 

Down Payment

A down payment reduces the amount you have to borrow. Lenders usually require 10-20% down for new cars and 0-10% on used. Making a larger down payment helps get better rates.

 

Monthly Payment

Your monthly payment is calculated using the loan amount, interest rate, loan term and down payment. It stays the same each month over the life of the loan.

 

Amortization

Amortization means paying off the loan balance over time with a mix of principal and interest in each payment. An amortization table shows the breakdown per month:

 

Month

Payment

Principal

Interest

Balance

1

$400

$100

$300

$9,900

2

$400

$103

$297

$9,797

 

In the beginning more interest is paid. As the balance declines over time, more of the payment goes to principal.

 

Watching Out for Predatory Lending

While most auto lenders operate fairly, some engage in predatory practices that take advantage of borrowers. Predatory lending involves deceptive or fraudulent tactics to profit from vulnerable consumers.

One sign of a predatory auto loan is an absurdly high interest rate, like 15-20% APR or higher. These lenders target those with poor credit who may feel they have no other options. The loans often have other abusive terms too, like very high fees or unreasonable default interest rates.

Predatory lenders may also:

 

  • Encourage borrowers to lie on their application
  • Hide key details in the fine print
  • Pressure buyers to accept unwanted add-ons like extended warranties
  • Require a GPS tracking device on the vehicle
  • Threaten repossession at the smallest sign of trouble

 

If you suspect unfair or deceptive practices, report the lender to the proper authorities. In Canada, you can file a complaint with the Financial Consumer Agency of Canada (FCAC). Your province may also have oversight agencies that can investigate and take action against predatory lending.

If you’ve already entered into a predatory auto loan, all hope is not lost. Speak to a credit counselor about your options. You may be able to refinance the loan with a more reputable lender. If the terms are truly abusive, legal aid may be able to help you get out of the deal.

While predatory lending sounds scary, being an informed borrower is your best protection. Know your rights, carefully evaluate any financing offer, and don’t be afraid to walk away from a “deal” that seems too bad to be true.

 

Maintaining Good Credit During Your Loan

After securing the loan and driving off the lot with your new (or used) car, the work isn’t over. It’s important to continue building and protecting your credit throughout the repayment period. Here are some tips:

 

Make payments on time every month – Delinquent or missed payments can tank your credit score very quickly. Set up autopay so you never forget and the payment is made on the due date.

 

Keep credit card balances low – Don’t increase other debts while repaying your car loan. High credit utilization also hurts your credit score.

 

Limit new credit applications – Every application is a hard inquiry that can ding your credit temporarily. Wait to apply for new credit until after you’ve built a solid payment history on the auto loan.

 

Ask for goodwill adjustments from the lender – If you do slip up and make a late payment, ask the lender to remove it from your credit report as a courtesy. This isn’t guaranteed but can work if you have a good track record.

 

Defaulting on your auto loan has severe consequences. The lender can repossess the vehicle and sell it to cover your loan balance. You are still responsible for any amount not recovered, which the lender can pursue through collections or a lawsuit. A repossession also appears on your credit report for seven years, making it very difficult to qualify for future loans or credit cards.

 

Other Transportation Options

While having your own vehicle is convenient, it’s not the only way to get around. Depending on your situation, public transit, car sharing services, bicycles, and other alternatives may be more affordable options than taking out an auto loan.

Public transportation like buses, subways, and trains can be an economical and environmentally friendly choice if available in your area. Fares are usually only a few dollars per ride or you can purchase unlimited monthly passes. Scheduling can take more planning but avoids car payments, gas, insurance and parking costs.

Car sharing through companies like Zipcar allows you to rent vehicles by the hour or day without the commitment of ownership. It gives you access to a car when you need one without monthly payments. Costs vary but tend to be competitive compared to traditional rentals.

Riding a bike is a zero-emissions option to consider for shorter trips. You avoid all vehicle expenses besides the initial bike purchase and maintenance. Biking is also great exercise. Just be sure to follow traffic laws and wear a helmet.

Carpooling with friends, family or coworkers to share rides can split gas and parking costs. You may also look into on-demand ride sharing services like Uber or Lyft, which can be cheaper than owning a car when used judiciously.

Consider your transportation needs and budget to decide if alternatives make more financial sense than taking on an auto loan right now. They can allow you to improve your credit first and qualify for better loan terms down the road.

 

Conclusion

Buying a car is an exciting milestone, but navigating auto financing can be confusing. This guide covered the key factors that impact your chances of getting approved and securing the best possible interest rate on a car loan in Canada.

To recap, while there is no universal minimum credit score required, you’ll want to aim for at least 661 if you want to qualify for prime lending rates under 5%. Even applicants with poorer credit scores in the 600s and 500s can get approved, but will pay higher interest rates over 10% or even 20%.

Beyond just your credit score, lenders look at factors like your income, existing debts, down payment amount, and the loan term you select. That’s why it’s so important to shop around with multiple lenders and dealers once you’re ready to buy. Comparing personalized rate quotes side by side helps ensure you get the best financing deal.

And remember, even if your credit is less than ideal today, some simple steps can go a long way to boosting your score over time. Pay all bills on time, lower credit card balances, limit new credit applications, and correct any errors on your credit report. With some diligent work on improving your credit, you can potentially save thousands on interest costs over the life of your loan.

While buying a car is rarely easy, arming yourself with the right information helps remove some uncertainty. By understanding credit requirements, seeking pre-approval, and exploring all your options, you can feel confident you’ll finance a vehicle you love on terms you can actually afford.

 

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Questions About Credit Score Requirements for a Car Loan

In Canada, the minimum credit score required to get approved for a car loan can vary between lenders, but a score of 650 or higher is generally recommended to qualify for the best rates. Some lenders may approve loans for borrowers with scores as low as 600, but the interest rates are usually much higher. The higher your score, the lower your interest rate will typically be.



The main factors that determine your interest rate for a car loan in Canada are your credit score, down payment amount, loan term, the vehicle make/model, and overall financial profile. Lenders look at your credit score, income, existing debts, and credit history to assess your risk level and set rates accordingly. Borrowers with higher scores, lower debt-to-income ratios, larger down payments and shorter loan terms generally receive the most favorable rates.



Yes, you can still qualify for car financing in Canada even if you have bad credit, but your options may be more limited. Many lenders will work with borrowers who have credit scores in the subprime range below 600. However, expect to pay significantly higher interest rates and potentially make a larger down payment. Having a reliable co-signer with good credit can help improve your chances of getting approved. Shopping around for lenders who work with bad credit applicants is key.



As of February 2023, the average interest rate on new auto loans from banks in Canada is around 6.89% for terms up to 72 months. For used cars, rates average approximately 9.97% currently. However, actual interest rates can vary significantly based on individual factors like credit score, down payment, etc. So it’s important to shop around with multiple lenders.

Yes, getting pre-approved for a car loan from a lender in Canada before visiting dealerships can be very beneficial. Pre-approval provides you with a rate and loan amount quote upfront, which allows you to shop and negotiate within your budget more effectively. Pre-approval also signals to the dealer that you are a serious, qualified buyer. This can give you more leverage to negotiate the best possible price.

Auto finance experts generally recommend putting down at least 20% of the vehicle’s purchase price if possible when getting a car loan in Canada. This amount lowers your loan principal resulting in more reasonable monthly payments. It also shows the lender you are financially committed. With less than 20% down, you may pay higher interest rates. However, $0 down options are available too. Shop around to find the right loan terms for your budget.

According to consumer research, the average monthly car loan payment in Canada is around $450 for new vehicles and $350 for used vehicles. However, actual payments can range much higher or lower depending on factors like the loan amount, interest rate, loan term length (e.g 24 months to 84 months) and any down payment made. It’s important to choose loan terms that match your budget.

Most Canadian lenders offer flexible auto loan terms ranging from 12 months to 96 months (8 years). 36-month, 48-month, 60-month, and 72-month terms are very common. Longer terms of 6-8 years result in lower monthly payments but significantly higher interest charges over the loan duration. It is wise to choose the shortest term you can afford. Shop lenders for the repayment timeline option that best matches your financial situation.



The most effective ways to get the lowest rates on a Canadian car loan are:

 

– Have an excellent credit score over 720

– Put down a larger down payment of 20% or more

– Choose a shorter loan term length (e.g. 36 or 48 months)

– Provide proof of stable, reliable income to the lender

– Choose a fuel-efficient, gently used vehicle rather than a brand new model

– Shop interest rates from multiple competing lenders and negotiate

 

Following these tips can help Canadian consumers secure the most competitive auto financing rates possible.

Some of the best options for competitive interest rates on Canadian car loans include:

 

– Your own bank or credit union

– Online lenders like RateHub and LoanConnect

– Credit unions like Coast Capital Savings and Prospera Credit Union

– Major banks like TD Canada Trust, RBC Royal Bank, and Scotiabank

– Auto manufacturers’ captive finance arms like Toyota Credit Canada

 

Leveraging pre-approvals and rate quotes from multiple sources almost always results in securing the overall lowest interest rates and best loan terms.

Adding a creditworthy co-signer significantly improves the chances of getting approved for a Canadian car loan, especially if you have poor credit or limited credit history yourself. The co-signer agrees to be equally responsible for repaying the auto loan if you cannot make the payments yourself. This provides the lender with a stronger assurance of getting repaid. As a result, more lenders may be willing to work with you, offer lower interest rates, and provide more financing options overall.



It is possible to qualify for auto financing in Canada even if currently unemployed or lacking traditional income proofs. Many lenders understand unique financial situations. Options like submitting recent bank statements showing cash deposits/balances, getting a creditworthy co-signer, or providing private lender references can demonstrate repayment ability when paystubs or tax documents aren’t available. Expect higher rates and restrictions until employment is established.

Canadian students needing a car loan have options like:

 

– Student line of credit/loans from a bank which can be used for auto purchases

– Being added as a secondary driver on parents’/guardians’ existing car insurance to borrow or share a family vehicle

– Applying for manufacturer student discounts and financing incentives

– Federal loan forgiveness programs on qualifying eco-friendly vehicles

– Looking into options through your school’s Student Union resources

 

Students should minimize co-signing requests, explore all discounts and flexible lender programs available to them, research used models, and consider public transport options before taking on significant auto loan debt.



Some of the best options for bad credit borrowers seeking car loans in Canada include:

 

– CarsDirect Canada – Specilizes in financing for all credit types

– Car Loans Canada – Large network of lenders work with bad credit

– TD Bank and ScotiaBank – Major banks with special bad credit loan programs

– Private lenders like Relative Finance, Rifco National Auto Finance

– Credit unions like Sunova Credit Union and Prospera Credit Union

 

Having some money saved for a down payment and securing a creditworthy co-signer can also help bad credit applicants get approved at better rates. Shop options thoroughly.



The easiest types of car loans to qualify for in Canada are:

 

  1. Pre-owned vehicle loans – Require smaller down payments and have lower credit score requirements compared to new vehicle loans. More lax on mileage and vehicle age limits too.

 

  1. Online lender loans – Online lenders like RateHub, LoanConnect and Mogo have very simple quick applications, can approve same day, and work with all credit score ranges.

 

  1. Dealer subvented loans – Many dealerships can get borrowers with weaker credit scores approved through subvented financing programs backed by auto manufacturers. Down payments are often waived.

 

So focusing your Canada auto loan search on used cars, online lenders and dealer financing can optimize your chances of getting approved.

If you have a bankruptcy or consumer proposal appearing on your Canadian credit bureau reports, there are still some possible options for obtaining an auto loan including:

 

– Waiting 2 years post-discharge before applying

– Working to systematically rebuild your credit first

– Getting a qualified co-signer on your application

– Exploring lenders who offer special financing for rebuilding credit

– Considering a secured loan requiring collateral

– Looking at private sales rather than dealerships

 

Meeting these types of alternative requirements and criteria can help improve the chances of auto loan approval for Canadians with bankruptcies or proposals on file.



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