How Can I Qualify for a Car Loan

You’ve decided that this is the perfect time to buy your first, very own car but you’re just unsure if you can qualify for a car loan or not. Want to know where you stand? Below are key points that you need to know and a step-by-step information that will guide you throughout the entire transaction.

Qualifications for a Car Loan

The important key points involved when applying for a car loan are: present income and employment history, financial and credit history, current debt and living expenses and finally credit score. Let’s tackle them one by one.

  1. Employment History and Present Income

Being new to your job won’t deny you the chance of getting a car loan but having a long, established work history will surely bring you closer to your goal. Generally, a lender will look at your recent employment status ( at least 2 years) and will require you to submit the most up-to-date paycheck and billing statements (i.e. credit card bill). Some may even contact your employer just for confirmation.

  1.   Current Debt and Living Expenses

    Buying a new car can be an exciting joyride but it is important that you stick to your budget and avoid choosing a vehicle that is out of your price range. Before choosing a vehicle, it would be wise to have an estimate of what your expenses will be after securing this loan.

Calculating your daily costs together with other expenses such as loan interest, fuel expenses, car insurance and maintenance will help you decide which car is the most ideal for your budget. Financial experts suggest that you mustn’t exceed 10% of your gross income. Meaning, if you’re earning $7,000 per month, the ideal budget for a car monthly payment should equal (or under) to $700.

In most financial loans – which includes car loan – the lender will dig deep into your financial history. This includes financial issues such as bankruptcy or whether you are currently paying alimony.

Always bear in mind that during the entire process, it is crucial that you are  honest with your answers. Covering up financial issues is illegal and will likely lead to a disapproval on your application or worse, owning a car that you can’t even afford..

  1. Credit Score

Basically, a credit score is a reflection of debt-to-income ratio and financial history. Other components that influence your credit score are the longevity of your bank accounts and credit issues like charge-offs, or any previous repossessions. There are three credit reporting agencies namely Equifax, Experian and TransUnion, that assesses your overall credit history and gives you a score (it runs from 300 to 900).

Borrowers that have exceptionally high credit scores often enjoy the lowest possible interest rates (as low as 0.00 %). They are those individuals that have a credit score of at least 700 and as high as 900. On the other hand, a mid range credit score (i.e. 600) will likely secure you an approval but with relatively high interest rates. Subsequently, very low credit scores (under 500) will lead to very high interest  rates or even a loan disapproval.

If you are in this situation, a cosigner can help you get approved. A cosigner is usually someone that has a good, reliable credit history and willingly assumes the obligation of paying the loan if in case you are unable to do so. To add, having a good cosigner for support can even help you get a better interest rate.

More Factors that can Affect Loan Approval And Interest Rate

Placing a down payment increases your chances of securing an approval. A down payment usually comprises about ten to twenty percent of the asking price. Consequently, a down payment will reduce your total amount of debt to your lender thereby also reducing the lender’s risk.

This reduced risk will give you the likelihood of an approval and lower monthly.payments. Moreover, a down payment shows commitment and reliability on your part.

As mentioned earlier, a good financial history is a positive indicator for the lender. Needless to say, a previous car loan that was successfully paid will tip the scales in your favor. Finally, any assets that can serve as collateral can also help with the overall application process.

Few Reminders before Applying

  1. Identity Proof

    In order to get an approval on your loan you will need to submit proof of identity. Normally, it requires submission of  multiple forms of identity (bearing your photo and signature). Most accepted primary and secondary forms of identification include passports, vehicle/home title and bank statements that show your name and address.

  1. Proof of Residency

    In a car loan, you will also need to submit a proof of residency. This is to ensure the lender that the address that you have given is valid in case of a loan default. A recent electric or water bill is sufficient enough. To add, a lease agreement or mortgage file can also be submitted as proof of residency.

  1. Trade-in Documentation

    If you plan on trading-in your existing vehicle, don’t forget to bring the necessary trade-in documents such as your vehicle title and registration.

  1. Proof of Insurance

Obtaining a proof of insurance is not required but it can help smoothen the process. Moreover, getting a quote from an insurance company will give you an estimate on the cost and can allow you to compare different insurance prices. Planning ahead will give you time to purchase the ideal insurance plan for your new vehicle.

Start Today

Still unsure if you’re qualified for a loan? Call New Car Canada now and we can give you a more detailed information about car loans. Our mission is to help you achieve your car dreams! Start filling out our simple online application  today.