What is the minimum credit score to get a car loan in Canada

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Buying a new car can be stressful, especially if your credit score is not perfect. In Canada, you will typically need a minimum credit score of 660 or above to qualify for most car loans. However, if your credit score falls below this level, there’s no need to panic, as some lenders provide car loans to those with lower credit scores.

Minimum Credit Score Requirements for Different Lenders

The process of buying a car can be exciting, but it can also be overwhelming, especially when it comes to financing. One of the most important factors to consider when applying for a car loan is your credit score. Different lenders have different requirements for credit scores, so it’s important to understand what you need to qualify for a loan.

Dealership Financing

Dealerships often collaborate with various lenders to provide a myriad of financing opportunities for their patrons, including the tempting option of zero-percent financing. This lucrative deal, however, is accessible to only a select few, with the most exceptional credit scores. A minimum credit score of 700 is usually required to have access to zero-percent financing, when it is available. 

If you’re contemplating financing through a dealership, negotiating the loan terms becomes paramount. Dealerships may be open to discussions around reducing the interest rate or throwing in other enticements, especially if you’re ready to put down a sizable down payment or consider a higher-end vehicle.

Banks and Credit Unions

Most banks and credit unions require a minimum credit score of 660 for a car loan. This is because they want to ensure that borrowers have a good credit history and are likely to repay the loan. However, some banks and credit unions may consider applicants with lower scores if they have a co-signer or a guarantor. 

A co-signer or guarantor agrees to take on the responsibility of repaying the loan if you fail to make payments. With a co-signer or a guarantor on the line, many financial institutions won’t impose any minimum credit score for the borrower. However, keep in mind that the co-signer or guarantor will be equally responsible for repaying the loan. If you fail to make payments, it could negatively affect their credit score and financial future. 

Online Car Lenders

Online lenders such as Car Loans Canada and Clutch have become increasingly popular in recent years, and they tend to have more relaxed credit score requirements than traditional lenders. Some online lenders may consider applicants with a credit score as low as 550, but they’ll likely charge higher interest rates to mitigate the risk.

One advantage of working with an online lender is that the application process is often faster and more convenient than traditional lenders. You can apply for a loan from the comfort of your own home and receive a decision within minutes.

Personal Loans

Personal loans from non-bank lenders can be a feasible option for financing a car purchase in Canada. Non-bank lenders, such as online lending platforms and private lenders, tend to accept borrowers with credit scores as low as 525. This tolerance for lower credit scores, however, comes with a price; their interest rates are generally higher, which could make some of these loans too burdensome for large purchases such as a car. 

Buy-Here-Pay-Here Dealerships

Buy-here-pay-here dealerships offer financing directly to customers, making them an option for those with low credit scores looking for a used car loan. Furthermore, many buy-here-pay-here dealerships require no minimum credit scores. However, they tend to charge higher interest rates and require substantial down payments.

Before considering a buy-here-pay-here dealership, it’s crucial to carefully review the terms and conditions of the loan. Make sure you understand the interest rates, down payment requirements, and repayment terms. You should also consider whether you have the means to make the payments on time and in full, as failure to do so could result in repossession of the vehicle and further damage to your credit score.

Other Factors Affecting Car Loan Eligibility

While credit score plays a significant role in determining car loan eligibility, it’s not the only factor that lenders consider. Other factors include employment status, income, debt-to-income ratio, and credit history and payment habits.

Employment Status and Income

Lenders want to know that you have a stable source of income to repay the loan. If you’re employed full-time and have a steady income, you’re more likely to be considered for a car loan. Self-employed individuals can also qualify for car loans, but they’ll need to provide additional documentation, such as tax returns.

It’s important to note that lenders may also consider the length of time you’ve been employed at your current job. If you’ve been employed for a long time and have a stable job history, you may be viewed as a more reliable borrower.

Additionally, some lenders may require a minimum income level for car loan eligibility. This is to ensure that you have enough income to cover the loan payments and other expenses.

Debt-to-Income Ratio

Your debt-to-income ratio, or DTI, is the percentage of your monthly income that goes towards debt payments. Lenders prefer applicants with a DTI of 36% or lower, but some may consider applicants with a higher ratio, depending on other factors.

It’s important to keep your DTI as low as possible by paying off debts and avoiding new debt. This can help you qualify for a car loan and get a better interest rate.

Credit History and Payment Habits

In addition to your credit score, lenders will review your credit history to assess your payment habits. It’s important to make all of your payments on time, as missed or late payments can negatively impact your credit score and your eligibility for a car loan.

It’s also a good idea to review your credit report before applying for a car loan. This can help you identify any errors or inaccuracies that may be negatively impacting your credit score.

How to Improve Your Credit Score for a Car Loan

If you’re looking to finance a car, having a good credit score is essential. A good credit score not only helps you secure a loan, but it can also lead to better interest rates and loan terms and even cheaper car insurance premiums. However, if your credit score is below the minimum requirements for a car loan, don’t worry, there are steps you can take to improve your credit score.

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Paying Bills on Time

Payment history has the most significant impact on your credit score. Late payments can have a negative impact on your score, so it’s essential to make sure that you make all of your payments on time. This includes credit cards, loans, and utility bills. Setting up automatic payments or reminders can help ensure that you don’t miss a payment.

Getting Another Credit Card

Obtaining another credit card, particularly a secured credit card, can be an effective strategy to improve your credit score, which is crucial when seeking a car loan. A secured credit card requires a deposit which serves as your credit limit, thereby reducing the risk to the lender. This makes it easier to obtain even if you have a lower credit score. The benefit of this type of card is that it reports to the major credit bureaus just like an unsecured card, helping to build your credit history over time. 

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Reducing Credit Card Balances

High credit card balances can negatively impact your credit score. It’s recommended that you keep your credit card balances below 30% of your credit limit. Try to pay down your balances as much as possible, and avoid maxing out your cards. If you’re struggling to pay down your balances, consider reaching out to your credit card company to see if they can offer any assistance.

Limiting Credit Inquiries

Each time you apply for credit, whether it’s a car loan, credit card, or other type of loan, it results in a hard inquiry on your credit report. Too many inquiries can lower your score, so it’s important to avoid applying for credit unless necessary. If you’re shopping around for a car loan, try to do all of your loan applications within a short period to minimize the impact on your score.

Regularly Reviewing Your Credit Report

Regularly checking your credit report is a smart move, as it can help you catch any errors or inaccuracies that might be dragging down your score. As a resident of Canada, you’re entitled to a free copy of your credit report each year from one of the major credit bureaus. If you come across any errors, be sure to dispute them with the credit bureau.

Although Equifax and TransUnion only provide one free credit report per year, many apps and banks allow Canadians to keep tabs on their credit score for free on an ongoing basis. It’s important to build your credit score with good financial habits, but keeping a close watch on it is also crucial. This way, if you make a mistake or if you’re hit with credit card fraud or identity theft, you’ll be able to address it much faster.

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How to get a better car loan through refinancing

To refinance a loan is to replace one loan with another with more favorable terms. For example, if you took a high interest car loan and your credit score has significantly improved since, it’s usually a good idea to consider refinancing it. By refinancing your car loan, you might get a lower interest rate and extend your loan terms. In other words, refinancing can help you save money.

Car loans, like credit cards, can help you build your credit score when managing your finances effectively. More specifically, car loans can improve your credit score in relation to three factors: payment history (i.e., how often and how much you pay), length of credit history (i.e., how long you have been using the credit), and credit mix (i.e., number of debts you are currently managing).

Suppose you consistently provide full payments on time and have a diverse debt that you manage effectively. In that case, your credit score will increase over time, making refinancing a good option to consider. However, note that it is probably a bad idea to diversify your debt just for the sake of a higher credit score, especially if there’s any chance you will not be able to pay it according to the agreed terms.

Tips for Getting the Best Car Loan Rates

Buying a car is a significant investment, and getting the best car loan rates can save you a lot of money in the long run. Whether you’re a first-time buyer or a seasoned pro, it’s essential to do your research and shop around for the best deal. Here are some tips to help you secure the best car loan rates:

Shopping Around for the Best Deal

When it comes to getting the best car loan rates, the first thing you should do is research multiple lenders. Don’t settle for the first loan offer you receive. Instead, take the time to compare the terms and rates of different lenders to find the best deal.

Some lenders specialize in car loans, while others offer a variety of loan products. Be sure to look for lenders that offer competitive rates and terms that fit your budget. You can also use online comparison tools to help you find the best car loan rates available.

Negotiating with Lenders

Just like when purchasing a car, it’s possible to negotiate the terms of your car loan. Be prepared to provide documentation to prove your creditworthiness and bargaining power. This may include your credit score, income, and employment history.

When negotiating with lenders, be sure to ask about any fees or charges that may be added to your loan. These can include origination fees, prepayment penalties, and application fees. Be sure to read the fine print and ask questions if anything is unclear.

Considering a Shorter Loan Term

A shorter loan term may result in a higher monthly payment, but it also means paying less interest over the life of the loan. If you can afford a higher monthly payment, consider opting for a shorter loan term.

Shorter loan terms also mean that you’ll own your car outright sooner, which can be a significant advantage if you plan to sell or trade in your car in the future. Additionally, if you have excellent credit, you may be able to qualify for a lower interest rate on a shorter-term loan.

The Bottom Line

Securing a car loan in Canada requires a good credit score, steady income, and a history of responsible credit management. If your credit score is lower than the minimum requirements, there are steps you can take to improve it and alternative options to consider. Use the tips provided in this article to make an informed decision and secure the best deal possible.

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Arthur Dubois is a personal finance writer at Hardbacon. Since relocating to Canada, he has successfully built his credit score from scratch and begun investing in the stock market. In addition to his work at Hardbacon, Arthur has contributed to Metro newspaper and several other publications