Buying a new or used car is a significant milestone for many Canadians, and getting an auto loan to finance your purchase is common. Unfortunately, not everyone is eligible for a car loan, and getting approval can be challenging in certain circumstances, such as lacking regular income or having a bad credit score.

To better understand your eligibility and if you qualify for an auto loan, we’ve outlined how to get approved for an auto loan below.

Minimum Requirements To Get A Car Loan Approval

Before applying for a car loan in Canada, you need to know the minimum requirements for approval. Lenders set these requirements to ensure the borrower can legally take out an auto loan and can repay the loan. Below are some of the minimum requirements you should be aware of:

  • Age: You must be at least 18 years old to apply for a car loan, as you must be legally capable of entering a binding contract.
  • Citizenship: You must be a Canadian citizen or have a permanent residency status to be eligible for a car loan in Canada. This is because lenders must verify your identity and residency status before approving your loan application.
  • Income: You should have a stable income source to repay the loan. Your income will help determine the loan amount you can qualify for — the more you earn, the larger the loan you can get.

Keep in mind that meeting these minimum requirements does not guarantee loan approval. Lenders also consider other factors, such as your credit score, debt-to-income ratio, employment history, and more, when considering your loan application. Let’s take a closer look at these other factors.

Credit Score and History

Your credit score is a three-digit number that represents your creditworthiness, and it’s based on your credit history. Lenders use this score and your credit history to determine how likely you are to repay the loan on time and the risk of you defaulting on the loan.

A good credit score and reliable credit history can increase your chances of getting approved for a car loan and can also help you get a lower interest rate.

Debt-to-Income Ratio

Your debt-to-income (DTI) ratio is the percentage of your monthly income that goes toward paying off debt. Lenders use this ratio to determine whether you can afford more debt. For example, if you earn $5,000 per month and have $1,000 in total debt payments monthly, your DTI would be 20% ($1,000 / $5,000 = 0.20)

A lower DTI ratio can increase your chances of getting approved for a car loan.

Employment History

Lenders also look into your employment history when considering your loan application. They prefer borrowers with stable employment and consistent income. If you have a good employment history, it can increase your chances of getting approved for a car loan.

Please note that meeting the minimum requirements and having a good credit score, a low debt-to-income ratio, and a stable employment history does not guarantee loan approval. Lenders often have additional approval requirements or may reject your application for other reasons.

So, research and compare different lenders before applying for a car loan. This can help you find a lender willing to work with you and offer you a loan that fits your financial situation.

Documents Required For Car Loan Approval

Buying a car is an exciting milestone in anyone's life, but it can also be daunting. With the average new car costing $61,000 and the average used car costing $39,000, financing is typically an important step in the car-buying process. Applying for a car loan can be a complex process that requires you to have certain documents on hand. Let’s review these documents.

Proof of Income

A key document when applying for a car loan is proof of income. This proof can come from various documents, including pay stubs, tax returns, employment verification letters, and more. The lender wants a steady income source allowing you to make on-time loan payments.

Self-employed folks may need to provide additional documentation, such as profit and loss statements, multiple years of tax returns, or bank statements.

Proof of Identity

You must also provide proof of identity when applying for a car loan. You can prove your identity with a driver's licence or passport. The lender will want to verify that you are who you say you are and that you can legally enter into a loan agreement.

Proof of Residency

Another important document for a car loan is proof of residency. You can prove your residency with a utility bill, lease, mortgage agreement, or other official document that shows your current address. The lender uses this to verify you’re a resident of the area and that they can contact you if necessary.

Information About the Car

If you’ve selected the vehicle you want to buy, the lender will want some information bout it. This can include the year, make, model, and vehicle identification number (VIN). The lender uses this information to determine its value and ensure it meets the lending criteria.

How To Increase Your Car Loan Approval Odds

Getting approved for a car loan can be challenging, especially if you have a low credit score or a high debt-to-income ratio. Fortunately, you can improve your chances of getting approved for a car loan with several tips.

Improve Your Credit

Your credit score and history are two of the most critical factors lenders look at when considering your loan application. Good credit history — on-time credit card, loan and other debt payments, low debt balances, and responsible financial decisions — generally translate to a credit score, indicating you’re a low-risk borrower and will likely repay the loan on time.

On the other hand, having a low credit score can make getting approved for a loan challenging. And if you do get your auto financing approved with bad credit, you’ll likely get a higher interest rate.

If your credit score is low, you can take steps to improve it, such as:

  • Paying your bills on time
  • Reducing your debt
  • Correcting any errors on your credit report

You can also consider using a credit monitoring service before applying for car financing to keep track of your credit score and receive alerts when changes occur.

Lower Your Debt-to-Income Ratio

A high DTI ratio indicates you are already heavily in debt relative to your income and may struggle to make additional loan payments. This indicates to lenders you’re a high-risk borrower, and they may hesitate to approve your loan application.

Improve your DTI ratio by paying off some of your debts or increasing your income by taking on a second job or a side hustle. You can also consolidate your debts into a single loan with a lower interest rate. This can help you save money on interest and reduce your monthly payments.

Increase Your Down Payment

Your down payment is the amount you pay in cash for the vehicle, then you pay the remaining balance with your auto loan. The higher your down payment, the less you need to borrow. When you struggle to get a loan approval, a little larger down payment may be all you need to get approved.

A higher down payment helps because it shows you’re putting more financial skin in the game. Plus, it lowers the amount the lender gives you, reducing risk.

Add a co-signer

A co-signer is someone that applies for a loan with you. If you have no credit or bad credit, a co-signer with good credit could give the lender enough confidence to lend you the cash. A co-signer has equal financial responsibility for the car loan, so if you miss a payment or default on the loan, the co-signer could endure the same consequences as you.

Compare Car Loan Options

Before applying for a car loan, shopping around and comparing different lenders is a good idea. Compare their interest rates, repayment terms, fees, and other variables to find the loan offer that meets your needs and budget.

You’ll also want to consider the total cost of the loan. This will include all the interest and fees associated with the loan and should be outlined in the proposed loan’s terms. This can help you determine whether a loan is affordable and fits within your budget.

While you generally want to limit the number of credit applications you submit, as each one can hurt your credit history and score, you can rate shop without impacting your credit score. Rate shopping is when you apply for the same type of loan from multiple companies within a short time — typically 14 to 45 days. When rate shopping, only the first credit inquiry will impact your credit score, and all subsequent inquiries will not.

Where to Apply for a Car Loan?

You can apply for a car loan in several ways, including at a bank or credit union, with an online lender, or at a car dealership. Each has advantages and disadvantages, so choose which one suits you best.

Banks and credit unions may offer lower interest rates and more flexible repayment terms than other sources, but they also tend to have more stringent approval terms and higher fees.

Car dealerships have multiple lending sources and can submit your information to several lenders for the best possible interest rates. They also often have special lenders for people with bad credit or no credit. However, car dealerships sometimes have higher interest rates. Some dealerships may also add interest points to their lenders' rates and profit off the markup.

Online lenders can be convenient because you can handle the entire process online. Also, online lenders often have options for folks with low credit scores. The downside is online lenders often have higher interest rates.

No matter which lender you choose, always read the loan terms and conditions carefully and ensure you understand them before signing any agreement. Examine all the fine print, including any fees or penalties, and ask questions if you don't understand something.

Get a Car Loan and a Quality Used Car at Clutch

Clutch, Canada’s premier online automotive retailer, not only offers quality used vehicles. We also have relationships with various lenders and financing options for all types of credit to get approved for a loan to purchase one of our vehicles.

Simply fill out an online credit application to get preapproved, then shop our inventory of high-quality used cars and choose one that meets your budget and preapproved loan terms. You can then complete your purchase 100% online, and we’ll deliver the vehicle to your home or work.

You can shop our used vehicles with complete confidence knowing that every vehicle has been through a 210-point inspection and reconditioning process and includes a 90-day or 6,000-km warranty. We also include a 10-day or 750-km test-own period. If you don’t love your Clutch vehicle during the test-own period, you can exchange it for another one or return it for a full refund.

Do you have a vehicle to trade in? Clutch accepts trades, and you can get a firm offer on your trade-in vehicle online. We’ll even come and pick up your trade-in vehicle. It doesn’t get much more convenient than that.