Can everyone get approved for a car loan?

Or, what really matters for car loan approval

There’s only one way to provide you with an honest answer, and that starts by filling out our credit application. Why? Because every credit situation is unique, and while almost everyone can get approved for a car loan, not everyone comes to the table with the same credit history and life situation.

Successfully navigating the approval process requires a partner that’s committed to understanding your unique circumstances and finding a solution that works for all parties.

These five factors determine whether you will get approved for a car loan: credit history; work history and income; debt and monthly expenses; money down; and the vehicle you choose.

We’ll walk you through each one to help you better understand your starting point on the path to approval. And, if you’re ready, we’ll work with you to get to the finish line, when you drive away in your next vehicle.

1. Credit history

Your credit history helps a lender learn more about previous loans and bill payments. What many people fail to realize is that it’s not the only factor. Too often, borrowers assume that a few bad marks in their credit past exclude them from any chance of car loan approval. It’s simply not true.

A summary of your credit history is obtained through your credit score, which looks primarily at your debt-to-income ratio and bill payment history. There are other factors, too, like the average age of your bank accounts (longer is better) and any collections or judgments against you in the past.

Canadian credit reporting agencies (Equifax and TransUnion) provide the credit scores that lenders rely on to determine credit worthiness of a borrower. Your credit score may fall anywhere between 300 and 900, with the best auto loan terms available to those with a credit score of 700 or higher. A score in the 600s may mean that you’ll pay slightly higher interest rates, while anything below 500 makes approval more challenging.

Bankruptcy results in the lowest possible credit rating, and the history of your bankruptcy stays on your credit report for up to seven years after your first bankruptcy. Still, it is possible to secure a car loan after bankruptcy. Lenders are most interested in seeing whether—before, during, and after bankruptcy—you’ve been able to keep up with your car payments. Repossession of a vehicle is far more damaging to your chances of approval than a general bankruptcy.

Remember: Your credit history doesn’t typically lead to a yes-or-no answer from a lender. Rather, it places you along a spectrum—a higher score means better interest rates and lower monthly payments, while a lower score may limit the amount a lender will offer or make borrowing money more expensive.

2. Work history and income

As with your credit score, your work history and income don’t immediately determine whether you will be approved, but they do inform the loan terms a lender is able to offer.

For the lender, this is about more than just how much money you make. Lenders prefer to see borrowers who have had the same employer for at least two years. If you just took a new, better, higher-paying job at another company, a lender isn’t going to penalize you. But if you’ve bounced from job to job every few months with gaps between employment, that presents a greater challenge.

Most car loans are for at least three years, which means the lender needs to predict the future of your income, and the most accurate way to estimate future earnings is by looking at your past work history and income.

How much you make influences how much money a lender will offer more than it influences the final yes-or-no on your loan application. If you’re early in your career or working part time, you may need to bring money to the table to finance a high-end ride, or, alternatively, need to wait until your next car to get that dream vehicle and stick with something more practical in the interim. (The best advice from financial experts suggests that your total vehicle expenditure should not exceed 10 percent of gross income.)

Before you head to the dealership, gather recent pay stubs to prove your declared income. Often, a lender will call your employer to verify your current employment, too.

3. Debt and monthly expenses

Your existing debt and monthly expenses are the flip side of a lender’s efforts to understand your income. After all, it’s not just about how much you make but also how much you spend. By pulling your credit scores, the lender will have already learned a bit about your debt-to-income ratio.

All monthly expenses come into play when applying for your loan, including less commonly considered expenses like alimony or child support. While it may seem a bit odd for your lender to ask whether you’ve been divorced, it’s common sense if you put yourself in their shoes: Would you loan someone $20,000 without learning about all their existing financial obligations?

As with income, there’s no set amount of debt that precludes your approval for a car loan, but your expenses may affect how much a lender will offer or the terms on which they’re willing to offer a loan. In general, fewer expenses and less debt put you in a better position to be approved for more money on better terms.

To think of it another way, a lender is interested in learning whether your income exceeds your expenses (including debt) and, if so, by how much. Your lender needs to verify that there’s a sufficient, positive gap between income and expenses to allow you to carry the added debt. So if you know that a promotion or raise isn’t in your near future, lowering your expenses or paying off your prior debts can manufacture that financial breathing room without requiring additional income.

4. Money down

Will you need money down? We’ve already written about this extensively, and the short answer is “No.” However, if we change the question slightly to ask whether it’s better to put money down, the answer is almost always “Yes.”

If you’re unable to get loan approval for the full cost of your vehicle or for the vehicle you want, a down payment can bridge that gap. Additionally, putting money down can ensure you always have equity in your vehicle, from the moment you drive it off the lot to the time you trade it in.

Money down is also a positive sign to a lender, as it demonstrates your ability to save money and your commitment to paying for your vehicle. A borrower who provides a down payment of 20 percent for a new vehicle (or 10 percent for a used vehicle) has backed up their end of the agreement but adding hard-earned money to the signed paperwork. Even if you can’t reach the 20 percent mark, any down payment boosts your likelihood of approval.

So, money down can have a positive impact on approval, but that’s not its only benefit. Beyond protecting you from the dreaded upside-down position, it will help you earn better loan terms, if only because you’ll be borrowing less money. Getting approved for a car loan is good. Getting approved for the right loan that fits your budget and your life is much, much better. And a down payment is a critical part of that process.

5. The vehicle

Approval for a car loan starts in one of two ways. For some, they know the car they want and work toward approval for a specified amount to cover the purchase a particular vehicle. For others, especially those in less-certain credit circumstances, getting approval is the first step. Finding out how much you will be able to borrow informs the type of car you plan to purchase.

Every car lot has its share of temptations, many of which come with soft-tops, grumbly engines, and a glossy, candy-apple-red finish. But there are also abundant choices that can help you work toward your long-term financial goals and solve your immediate transportation needs.

As you work with a lender to gain approval, make sure the lender is just as committed to you are to building a stable financial future. That means getting the right loan for the right vehicle.

Final thoughts

It’s a simple equation: A lender assumes risk when loaning money in the same way that you assume risk if you lend a friend a few bucks. The difference, of course, is that the price of a car means a loan amount far greater than the casual exchange of dollars between friends.

The principles, however, are unchanged. The more a lender learns about your income and past debt management, the better informed the lender becomes. A good lender uses that information to come up with a solution that works for all parties, limiting the risk to the lender while also helping you solve your transportation needs and build (or rebuild) your credit worthiness.

We believe that just about everyone can be approved, but not everyone will be approved on the same terms. And no one can be approved until they begin the application process, so why not start today?