How do I know if I qualify for a car loan?

Or, what you should know about auto loan rates and bad credit auto loans

Can’t wait to drive off the lot in your shiny new vehicle? Not sure what it will take to make that happen? We’ve laid out each factor to consider to help you learn whether you’ll qualify for a car loan, as well as each piece of personal and financial information you’ll need on-hand throughout the process.

How to know if you’ll qualify—and for how much

As you may imagine, the key determinants in qualifying for a car loan are your personal finances—everything from your current income to credit history. The amount of money available to you depends on several factors, notably your work history and income, outstanding debt and monthly expenses, and your credit score.

1. Work history and income

When it comes to work history, most loan providers look to see whether you’ve had the same employer for at least two years. Being in a new job doesn’t mean you won’t be approved, but having demonstrated a stable, multi-year work history certainly counts in your favor.

To verify your income to a lender, expect to bring recent pay stubs and bank statements that offer clear proof. Some lenders may call your employer to confirm your work status.

2. Outstanding debt and monthly expenses

Determining how much you can afford to borrow is a task for you and your lender. Before applying for a car loan, assess your ability to purchase a new car and what type of car fits reasonably within your budget. You can calculate many of the same variables the lender uses to determine your eligibility.

For your own internal calculations, remember to include rough estimates for aspects beyond the initial car purchase, such as gas, maintenance, insurance, and interest. While you may not be able to budget hard numbers until after purchase, you can better predict the overall expenses associated with the new vehicle.

Most financial experts recommend that your total expenditure on cars—no matter how many you own—should not exceed more than 10 percent of your gross income. To give an example, the median family income in British Columbia is about $72,000, or about $6,000 per month. Ten percent of that amount is $600, so your car payment should come in at or under that figure.

When you complete a full credit application, anticipate deep research into your financial history, including whether you’ve filed for bankruptcy within the past seven years. Some lenders will also ask about your marital status in order to determine whether you owe alimony.

Whether you’re filling out an online application or providing in-person responses, be open and honest with all of your answers. Intentionally misleading the lender on your credit application is illegal and, even if it goes unnoticed, will result only in your possession of a vehicle you cannot afford.

3. Your credit score

Your credit score is a product of your debt-to-income ratio and bill-payment history. Other factors that contribute to it include the average age of your bank accounts and any negative events, such as charge-offs, judgments, or collections. Canadian credit reporting agencies (Equifax and TransUnion) provide your score, which ranges from 300 to 900.

A higher credit score gives you the best chance to receive the lowest offered rates. At one time or another, you’ve probably seen advertisements for low—even zero percent—interest rates. These rates are not mere gimmicks, but they typically are available only to those who have credit scores of at least 700, in addition to other positive factors in their financial assessment.

A credit score in the middle range, around the 600s, usually means you will pay a slightly higher interest rate, while a score of 500 or below could mean significantly higher rates or the inability to get approved. A cosigner for your loan—someone with a stronger credit history to assume responsibility for the loan in the event of a default—can help with approval and interest rates.

Higher interest rates mean higher monthly payments, which should be factored into your calculations for the type of car you can afford. Consumers are entitled to one free credit report each year, which is a good way to monitor your credit and ensure no major blemishes or mistakes exist. At the very least, knowing your credit score—good or bad—helps you plan for your upcoming car purchase.

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Other factors that influence your loan approval and interest rate

One of the best ways to increase the odds of loan approval is to bring a down payment of 10 to 20 percent of the purchase price. A down payment reduces the total amount of your loan, which in turn reduces the degree of risk for the lender. Lower risk means a greater chance of approval, as well as smaller monthly payments for you. Further, demonstrating your ability to save money for a down payment reflects positively for approval of your loan.

Getting your loan approved also relates to your specific history with car loans. A successfully repaid car loan in your past can go a long way in the approval process.

Another factor in the process is the planned length of your loan. Generally, any loan duration over 60 months may include an increased interest rate.

If necessary, existing assets may help serve as collateral for your loan. These may include a home or other car; in most cases, however, the car you purchase suffices as collateral against your loan.

Before applying, make sure you have…

1. Proof of identity

Any inquiry into your personal finances, for the purpose of approving your car loan, requires proof of identity. Many financing institutions require multiple forms of photo identity, frequently with your signature, but at the minimum you should have a valid driver’s license.

Other commonly accepted forms of primary and supplementary identification include government-issued passports, existing vehicle or home titles, and bank statements (with a name and address that match your driver’s license and other paperwork).

2. Proof of residence

When applying for a car loan, you’ll need to provide the potential lender with proof of your residence. This is so the lender can get in touch with you via mail, and also so the lender has a physical address on record in the event of a loan default.

Proof of residence is most often verified with a recent utility bill, although a lease agreement or mortgage paperwork may also be used in many circumstances.

3. Trade-in documentation

Your existing vehicle, if you have one, affects your loan application, as its remaining value may lower your overall purchase costs, which, in turn, may affect your loan approval and rate. If you’re planning on trading in a vehicle, make sure you have your vehicle title and registration with you when applying for a loan.

4. Proof of insurance

It’s not absolutely necessary to have proof of insurance when applying for a car loan, but it helps with the process. Taking the time to get a quote for insurance from several insurers will help you better understand the total cost of a new (or used) car and allow you to comparison shop for insurance. Waiting until the moment of purchase will put added pressure to complete the process quickly, lessening your ability to shop for the best plan to meet your needs.

Starting the loan application process

The easiest way to find out if you qualify for a car loan is to give us a call or follow the directions on our secure online credit application. Once we have received your application, we will call to confirm receipt and discuss possible options.

We will do everything we can to approve your application, even if you have imperfect credit history. If we are unable to qualify you now, we will consult with you or your credit bureau to provide ideas on how you may qualify down the road. After all, we’re here to help!

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