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What Impacts Car Loan Approvals

What Impacts Car Loan Approvals

Buying a new car is an exciting experience. However, navigating the auto loan process can be daunting, especially if your finances aren’t perfect. According to TransUnion, the auto loan approval rate in Canada has dropped to 73% in 2022, down from 79% pre-pandemic. With over 1 in 4 applications now being rejected, it’s more important than ever to understand what impacts your chances of getting approved.

In this comprehensive guide, we’ll explore the key factors lenders evaluate when making auto loan decisions. You’ll learn what goes into determining your interest rates and monthly payments. We’ll also provide actionable tips to optimize your financial profile and boost your odds of a quick approval.

By the end, you’ll understand how to set yourself up for success and get the keys to your new car faster.

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What is a Car Loan?

A car loan is a type of secured loan used to finance the purchase of a new or used vehicle. With a car loan, you borrow money from a lender like a bank, credit union, or other financial institution to cover the cost of the car. You then repay the loan amount plus interest in monthly installments over a set repayment term. The car itself serves as collateral on the loan.

Car loans allow you to pay for a vehicle over time rather than paying the full price upfront in cash. They make owning a car more affordable. Car loans typically last between 24 and 84 months, with longer terms resulting in lower monthly payments but more interest paid over the life of the loan.

When you take out a car loan, the lender retains ownership of the car title until you repay the loan in full. If you default on the loan, the lender can repossess the vehicle.


Why Get Pre-Approved

Getting pre-approved for an auto loan can be extremely beneficial compared to just applying for any loan. Here are some of the key advantages of getting pre-approved first:


  • You’ll know your real loan options – By going through pre-approval, you’ll get a clear picture of the loan amount, rates, and terms lenders are willing to offer you based on your specific financial situation.
  • Strengthens negotiating power – Being armed with a pre-approval letter shows dealers you’re a serious buyer and can make financing terms non-negotiable.
  • Speeds up the process – Having already gone through underwriting, final loan approval goes much quicker after you’ve selected a vehicle.
  • Avoids surprises – Pre-approval leaves little room for any unexpected hiccups derailing your loan later, so you can shop confidently.
  • Saves time – You won’t waste time applying for loans you don’t actually qualify for or negotiating financing terms that ultimately fall through.
  • Minimizes credit score impact – Only one hard credit check is needed initially rather than each application resulting in a new inquiry.


While pre-approval may add an extra step upfront, the benefits often make it well worth taking the time to go through the process.


Credit Score

Your credit score is one of the most important factors lenders look at when deciding whether to approve you for a car loan. Your credit score is a three-digit number that is calculated based on your credit history and represents your creditworthiness. The most commonly used credit scoring models are from FICO and range from 300 to 850.

In general, the higher your credit score, the better your chances of getting approved for a car loan with favorable terms like lower interest rates. A credit score above 720 is considered excellent and will qualify you for the best rates from most lenders. A credit score between 690 to 719 is still considered good. Scores between 630 to 689 are fair and may get approved but with higher rates. Anything below 630 is considered poor credit and will make getting approved very difficult.

Here is a breakdown of general credit score ranges and their impact on auto loan approvals:


  • 800-850 – Exceptional credit. Almost guaranteed approval with the lowest rates.
  • 740-799 – Very good credit. High likelihood of approval with good rates.
  • 670-739 – Good credit. Decent chance of approval though interest rates may be higher.
  • 580-669 – Fair credit. Getting approved will be challenging and interest rates will be quite high.
  • 500-579 – Poor credit. Very difficult to get approved unless you meet other criteria.
  • 300-499 – Very poor credit. Approval will be very unlikely.


Before applying for a car loan, it’s highly recommended you check your credit score so you have a realistic expectation of what rates and terms you may qualify for. There are a number of ways to check your credit score for free. If your score is on the lower end, taking steps to improve it several months before applying can significantly boost your chances of approval and make financing much more affordable.


Debt-to-Income Ratio

Your debt-to-income ratio (DTI) is another key factor lenders evaluate. This ratio compares your total monthly debt payments to your gross monthly income. It provides a snapshot of how much incoming cash flow is already tied up in paying off debts.

Lenders prefer to see your DTI under 36%. This means your total monthly debts like car loans, credit cards, student loans, mortgage, etc. should not exceed 36% of your total gross monthly income before taxes.

A high DTI over 50% makes approval very difficult, as it suggests you have little wiggle room to take on another car payment. The lower your DTI, the better when applying for a car loan.

Having a DTI under 30% or lower is ideal. Work on paying down credit cards and other debts to lower your ratio. Avoid taking on new financing until after you’ve been approved for the car loan.


Down Payment

The down payment is the amount of money you pay upfront when purchasing a vehicle. Lenders view a larger down payment as less risk because you are contributing more equity upfront and borrowing less. The recommended down payment percentage for a car loan is:


  • 20% or more – Significantly boosts approval odds and gets you the best rates
  • 10% to 19% – Considered a good down payment amount
  • 5% to 9% – Minimum required by most lenders
  • 0% to 4% – High risk, usually requires top tier credit


Putting down 20% or more is ideal as it shows the lender you are financially committed to the loan and have the means to make a substantial down payment. It reduces the amount financed, lowering the risk of default. A 20% down payment on a $20,000 vehicle would be $4,000.

Down payments between 10% to 19% are still favorable. For that same $20,000 vehicle, a 15% down payment would be $3,000, representing a strong commitment.

Most lenders require a minimum down payment of 5% to 9%. But meeting this bare minimum amount often results in higher interest rates or denial for applicants with less than stellar credit.

Zero to low down payments are risky for lenders and will only be accepted for those with pristine credit and financial profiles. You generally need a FICO credit score above 720 to qualify for a near zero down payment car loan.


Loan Term

The loan term is the length of time you will take to pay off the auto loan. Common loan term lengths are 24, 36, 48, 60, 72, and 84 months. The longer the term, the lower your monthly payment will be. However, you’ll pay more interest over the life of the loan with a longer term.

Lenders usually offer terms up to 84 months (7 years). Shorter terms like 24-36 months are best for those who can afford higher payments. Longer terms spread the payments out over more time, but increase the total interest paid.

Opt for the shortest term length you can comfortably afford. This saves money on interest and pays off the loan faster. Make sure your budget allows you to handle the higher monthly payment. Avoid stretching out the term just to get a lower payment – you’ll pay much more over the life of the loan.

In general, a good rule of thumb is:


  • 24-36 months – For new vehicles or if you can afford higher payments
  • 48-60 months – For used vehicles or average affordability
  • 72-84 months – Only if necessary for affordability, but expect higher interest costs


The loan term impacts your interest costs more than any other factor. Carefully consider the length to find the right balance for your budget and long-term savings.


Vehicle Purchase Price

The purchase price of the vehicle you want to finance plays a big role in the loan approval process. In general, the more expensive the vehicle, the more difficult it will be to get approved, especially if you have limited finances or less-than-stellar credit.

Lenders view financing an inexpensive, basic vehicle as less risky than financing a luxury or specialty car that costs significantly more. The cheaper the car, the easier it will likely be to get approved for financing it.

For buyers with great credit and ample income, getting approved for a high-end vehicle may not be an issue. But for buyers with poor credit, significant debts, or a low income, trying to get approved for an expensive car can be very challenging.

That’s because the more expensive the car, the larger the loan amount will need to be. Lenders are wary of lending large sums of money to high-risk borrowers. Even if you can technically afford the monthly payments, a lender may deny financing if the overall loan amount seems too risky.

As a rule of thumb, if your credit score is under 650, your debt-to-income ratio is over 50%, or you have limited savings, it’s best to opt for an inexpensive used car rather than a brand new luxury model. The lower the overall price, the better chance you’ll have of getting approved.

Setting your sights on a lower-priced vehicle that requires a smaller loan that poses less risk to the lender will significantly improve your chances of getting approved for auto financing.


Improving Credit Score

Your credit score plays a major role in determining if you’ll get approved for an auto loan and what interest rate you’ll pay. The higher your credit score, the better your chances of getting approved and securing lower interest rates. Here are some tips to improve your credit score before applying for a car loan:


  • Pay all bills on time – Payment history makes up a significant portion of your credit score. Set up automatic payments or payment reminders to avoid missed or late payments.
  • Lower credit utilization – Don’t max out your credit cards. Experts recommend keeping utilization below 30%. Pay down balances to lower amounts owed.
  • Avoid applying for new credit – Each application can cause a small, temporary hit to your score. Hold off on new credit cards or loans until after your auto loan.
  • Correct errors on your credit report – Errors can negatively impact your score. Review all three credit bureau reports and dispute any inaccuracies.
  • Become an authorized user – Ask a family member with good credit to add you as an authorized user on a credit card. It can give your score a boost.


With some time and effort, you can improve your credit score significantly and put yourself in a better position for auto loan approval. Track your progress over several months using free credit monitoring services.


Lowering Debt-to-Income

Your debt-to-income ratio compares your total monthly debt payments to your gross monthly income. Lenders want to see that your DTI is 36% or lower. Here are some strategies to lower your DTI and improve your chances of auto loan approval:


  • Pay down credit cards and other debts to lower minimum monthly payments
  • Shift balances to lower interest rate cards to reduce monthly interest charges
  • Consolidate multiple higher interest debts into a lower rate personal loan
  • Ask creditors for lower interest rates to reduce monthly payments
  • Pay off installment loans and other fixed debts completely
  • Increase your income with a side gig, promotion, new job, etc.
  • Have a co-signer with good credit join your auto loan application
  • Wait to apply until you pay down debts and improve your DTI ratio


With a concerted effort to pay down balances, consolidate debts, earn more income, and optimize your credit mix, you can lower your DTI substantially and boost your auto loan approval odds.


Saving for Down Payment

Having the funds for a sizable down payment can greatly increase your chances of auto loan approval. Lenders view borrowers who put more money down as lower risk. Here are some tips to save up your down payment:


  • Open a dedicated savings account. Having a separate account just for your down payment will help you avoid dipping into the funds for other expenses.
  • Automate deposits. Set up automatic transfers from your checking to your down payment savings account each pay period.
  • Cut discretionary spending. Identify areas where you can trim your budget, like dining out, entertainment or impulse purchases.
  • Pick up a side gig. Use extra income from freelance work, driving for a rideshare service, etc. to build your down payment faster.
  • Sell unused items. Declutter your home and sell unwanted furniture, electronics, clothing and more to pad your savings.
  • Apply windfalls strategically. Put any tax refunds, bonuses or monetary gifts directly into your down payment fund.


With disciplined saving over time, you can amass the chunk of cash many lenders look for to approve loans with more favorable terms.


Choosing Loan Term

The length of your car loan term is an important factor lenders consider when approving a loan. The loan term is the number of months it will take you to pay off the loan. Most car loans range from 24 to 84 months (2 to 7 years).

Here are some factors to consider when choosing your loan term:


  • Monthly payment amount – A shorter term means higher monthly payments, while a longer term lowers the payments.
  • Interest paid – Shorter terms mean you pay less interest over the life of the loan.
  • Loan balance – Longer terms take longer to pay down the principal.
  • Future plans – If you plan to sell the car soon, a shorter term prevents being upside down.
  • Budget – Make sure the monthly payment fits within your budget.
  • Payoff goal – Choose a term that aligns with when you want the loan paid off.


In general, opting for the shortest term you can comfortably afford is recommended. This saves on interest paid and builds equity faster. However, your budget and plans for the vehicle should dictate what term length makes the most sense.


Getting Pre-Approved

Getting pre-approved for an auto loan is one of the best ways to improve your chances of getting approved and securing a good interest rate. Here is a step-by-step guide on how to get pre-approved:


  1. Check your credit report and score – Make sure there are no errors or issues that could negatively impact your application. Aim for a score of 700+.
  2. Gather necessary documents – This includes proof of income, tax returns, bank statements, and any other financial info needed.
  3. Research lenders and rates – Compare options from banks, credit unions, and online lenders. Narrow down 2-3 options.
  4. Complete online application – Fill out application forms for your top choices. This initiates a soft credit check.
  5. Get pre-approval letter – If approved, you’ll receive a pre-approval letter with rate and terms. It’s not a guarantee but shows you qualify.
  6. Shop with confidence – With letter in hand, you can negotiate at dealers knowing you are very likely to get financed.


Getting pre-approved takes some legwork upfront but gives you peace of mind and strengthens your hand when purchasing a vehicle. Just be sure to complete the full application within 30 days or the pre-approval can expire.


Applying for Loan

Once you’ve gotten pre-approved and selected the vehicle you want, it’s time to officially apply for the loan. Here’s what the application process typically entails:


  • Complete loan application – You’ll need to provide personal details, employment information, income, expenses, debts, assets, down payment amount, etc.
  • Submit required documents – Lenders will request documents like proof of income, ID, insurance info, etc. to verify application details.
  • Allow credit check – The lender does a hard inquiry on your credit to finalize precise loan terms.
  • Get final approval – The lender reviews your entire application and makes a final loan decision.
  • Sign loan agreement – This legally binds you to the loan terms like amount, APR, length, payments, etc.
  • Complete purchase – With approved financing, you can now buy the vehicle!


It’s important to provide accurate information throughout the application process. Approval can be revoked if application details are found to be false. Be transparent about your financial situation to make sure you get a loan you can truly afford.



Getting approved for a car loan in Canada can seem daunting, especially if your finances are not in perfect shape. However, by understanding the key factors lenders evaluate and taking steps to optimize each area, you can significantly boost your chances of a positive loan decision.

To recap, the main elements that impact loan approval are your credit score, debt-to-income ratio, down payment amount, loan term length, and vehicle purchase price. Each of these areas provides an opportunity for you to tip the scales in your favor.

Focus on improving your credit score, lowering your debts, saving for a sizable down payment, opting for a shorter loan term, and keeping the car price reasonable. Getting pre-approved first also allows you to know your chances before even applying.

While every situation is different, being proactive in bettering your financial profile for these key factors will help set you up for success in getting approved for the car loan you need.

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Questions About What Impacts Car Loan Approvals

The main factors that impact getting approved for a car loan in Canada are your credit score, income, debt levels, down payment amount, and the age and value of the vehicle you want to purchase. Lenders assess these factors to determine your creditworthiness and ability to repay the loan. A higher credit score, higher income, lower debt levels, larger down payment, and lower car loan amount generally increase your chances of approval.

Your credit score is one of the most important factors lenders consider when evaluating your car loan application. In general, the higher your credit score, the more likely you are to get approved and qualify for lower interest rates. In Canada, a credit score above 660 is considered good and increases your chances of approval. Scores below 620 can make it more difficult to get approved for an auto loan. Having a history of late payments or defaults can also negatively impact your ability to qualify.

Most Canadian lenders prefer your debt-to-income (DTI) ratio to be below 40%. This means your total monthly debt payments, including the potential new car loan payment, should not exceed 40% of your gross monthly income. Some lenders may approve DTIs up to 50%, but the interest rates are typically higher. Keeping your DTI low increases the chances of getting approved and getting better rates.

While no down payment is legally required to get approved, a down payment of at least 10-20% of the vehicle purchase price is recommended and can help improve your chances of getting a car loan in Canada at better rates. With a larger down payment, you are borrowing less money which shows the lender you are financially responsible. It also lowers the risk of the bank not getting its money back if the car is repossessed.

Yes, Canadian lenders usually prefer shorter loan terms as it represents less risk for them. Loans with longer terms, like 7 or 8 years, have higher chances of default as the loan balance remains higher for longer. Terms of 2-5 years are commonly approved, with 4-5 years being ideal. Shorter terms also mean you pay less interest over the life of the loan.

Getting approved for an older, high mileage vehicle may be more challenging in Canada. Most lenders prefer cars less than 10 years old with under 200,000 km. Loans for older vehicles often come with higher interest rates as they represent more risk for the lender. Providing a larger down payment and having excellent credit can help improve your chances with an older car.

Typical documents needed for a car loan approval in Canada include: valid Canadian driver’s license, proof of income (recent pay stubs), proof of address (utility bill), proof of auto insurance, details on the vehicle (make, model, year, mileage), down payment amount, signed purchase agreement, and personal details like full legal name, date of birth, SIN number.

Yes, getting pre-approved before shopping for a vehicle can improve your chances of ultimate approval in Canada. Pre-approval provides a rate and loan amount you qualify for ahead of time. This allows you to negotiate prices and shop with confidence, knowing the monthly payments you can afford. While a hard credit check is required, the impact is minimal.

When shopping for the best car loan rates, having up to 3 inquiries from auto lenders in a 15 day period will only count as a single inquiry on your Canadian credit report. This allows you to apply with multiple lenders to compare rates without excessively damaging your credit score. More than 3 inquiries can start to negatively impact your score.

Yes, applying with a cosigner that has good credit is an effective way to boost your chances of approval for a Canadian auto loan, especially if you have poor credit or limited credit history. The cosigner becomes equally responsible for repaying the loan, so the lender has an additional assurance they will get repaid. This can help you qualify and get better interest rates.

Auto loan interest rates in Canada can range significantly based on your creditworthiness:


– Excellent credit (720+): 2.49%-5.99%

– Good credit (680-719): 5.99%-9.99%

– Fair credit (620-679): 9.99%-14.99%

– Poor credit (below 620): 15%-29%


So make sure to verify your credit report and score first to set proper expectations on rate. Improving your credit can save thousands in interest costs.

Defaulting on an auto loan payment in Canada for over 3 months can result in serious consequences:


– Damage to your credit score making future loans more difficult

– Getting calls from collection agencies

– Potential for loan acceleration requiring full payment

– Vehicle repossession

– Still owing remaining loan balance even after vehicle repossession

– Getting taken to court and risking wage garnishment


So make sure you carefully consider the monthly payments you can afford.

If your auto loan application gets denied in Canada, you have several options including:


– Appealing the decision by providing more documentation to support your ability to repay

– Applying with a cosigner that has better credit to improve chances of approval

– Improving your credit score and financial profile and reapplying in 6-12 months

– Considering less expensive vehicles that require smaller loan amounts

– Increasing your down payment amount to reduce how much gets financed

– Accepting a higher interest rate if offered by the lender


Addressing any issues or concerns highlighted by lenders can help you eventually get approved.

Most Canadian lenders allow trade-ins, which can help improve the chances of getting approved for a car loan. The trade-in value reduces the amount needing financing. Having positive equity in the trade-in also means getting cash back to use as a down payment. Just beware of dealers advertising extremely high trade-in values that may not get fully honored by lenders.

It’s generally recommended to first get pre-approved directly through a bank or credit union when seeking auto loan approval in Canada. This allows you to know your rate and budget ahead of visiting dealers. You can still finance through the dealership later if they can beat the pre-approval terms. This gives you maximum negotiating leverage and financing options.

The best rates on Canadian car loans typically come from:


Excellent credit (720+): Credit unions, smaller banks

Good credit (680-719): Big banks like RBC, TD, Scotiabank

Fair credit (620-679): Specialty lenders like Carfinco Financial, Rifco National

Poor credit (below 620): Subprime lenders


Checking rates from multiple providers can save thousands in interest, but avoid applying extensively to minimize credit score impact.

Important terms to evaluate when examining a Canadian auto loan contract include:


– Interest rate and whether it is fixed or variable

– Monthly payment amounts and due dates

– Total fees like processing fees or early repayment fees

– Loan amount and term length

– Prepayment terms if wanting to pay off early

– Default clauses like late fees and repossession terms

– Insurance requirements and options


Understanding all these details is essential to avoid surprises.

If you experience financial hardship repaying your current Canadian car loan, you may qualify for:


– Refinancing your loan to lower the monthly payments

– Payment deferrals for a short-term relief

– Adding a cosigner to the loan

– Voluntarily surrendering the vehicle instead of defaulting payments

– Selling the vehicle and using proceeds to clear loan balance

– Debt consolidation through a lower rate loan


Discussing relief options with your lender right away can help avoid further credit damage or legal action.

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