What Factors Are Considered When Applying For a Car Loan?

What Factors Are Considered When Applying For a Car Loan?

Too often, Canadians searching for car loans in Toronto or other cities wrongly assume lenders only look at one thing: your credit score. After all, car dealerships usually talk about that number incessantly, so it’s understandable why this misperception exists.

Perhaps you know there’s more to your qualification than your credit score. If so, you’re ahead of many car shoppers, but that doesn’t mean you’re prepared. You need to know what else a lender will consider before extending credit to you, otherwise you could very well go through a frustrating and fruitless process while trying to secure financing for your car.

Knowing what lenders look at lets you know what you need to do

Being armed with the following knowledge, you won’t be caught by surprise if other factors about your life can complicated the process of getting a car loan. Even better, you’ll know to address certain potential problem areas, smoothing out the approval process and possibly helping you to get a better interest rate.

Credit Score

Of course, you probably already knew lenders looked at your credit score. When you apply for a loan, you consent to the lenders pulling your credit file and looking at your score for the purpose of getting approved.

This is perhaps the biggest factor for determining not only if you’re approved for car loans in Toronto and the rest of Canada, but also what kind of interest rate you’ll get. Lenders use the credit score to gauge how responsible you are with your credit.

In Canada, credit scores can be anywhere from 300 to 900 points. The higher the number, the better. When you’re first starting out building credit, your score will be toward the bottom. Hopefully, over time, you get closer to the upper range.

Credits scores are generated using an algorithm. While the credit bureaus don’t want to disclose exactly how the scores are created since that could allow people to beat the system, they have said several items are used to arrive at that magical number. These include what debts you currently owe, your history of paying debts on time, active collections against you, and how long you’ve had different debts.

Essentially, the credit score is treated by lenders as a statement of how risky it would be to lend to you. The higher that number, the less risk is involved. This is why a low credit score might mean you can’t get car loans in Toronto, or you get approved at a high interest rate to compensate for the risk. The score is just an easy way to understand all the information the credit bureaus have collected about you, streamlining the approval process.

Credit History

While your credit history is somewhat reflected in your credit score, expect lenders to look at the actual history in your file. This can tell certain things about your current financial situation as well as your tendency to repay loans as agreed.

Among the items a creditor will be looking for might be any late or slow payments. While it’s understandable if you have a few, a pattern of paying on your loans late can demonstrate you’re not well organized and so will struggle to pay your car loan on time as well. Judgments against you, which could be from former creditors or others, are also a bad sign. If you have a bankruptcy appearing on your credit report, that can also negatively impact your application.

Creditors can also be keenly aware of too many inquiries on your credit report. That might mean you’re trying to access credit without much thought, which is a potential sign of irresponsibility.

What You Make

How much you make each month, or your income, is another big factor lenders consider before approving you for any car loans in Toronto. While this certainly protects the lender, this actually guards you from financial ruin, at least to an extent. If you don’t have the financial means to pay back a debt, it’s better that you don’t take on that debt at all.

As you fill out your loan application documents, you’ll need to state how much you make and provide proof. This usually is in the form of a paystub from your employer or bank statements showing what you get paid and how often.

The point of providing trustworthy, third-party documents to prove your income is that lenders want to guard against fraud. Unfortunately, there are some individuals who will lie about their income just to get a loan they can’t reasonably afford. It’s not a wise decision and usually it ends in disaster, which is why your income must be verified first.

Remember, income doesn’t just have to be what an employer pays you. Disability, legal settlement distributions, child support, and other regular installments of money can count towards your overall income.

Employment History

Most lenders will want to know something about your employment history before they give you any car loans in Toronto. That might sound invasive, but it’s a way to protect against people who might not have the means necessary to pay the money back as agreed.

Just how much employment history a lender wants depends on which one you’re dealing with. Some will require you to disclose the past two years of your employment history, while others might want as little as the past three months.

A lender will want to know where you’ve worked

You’ll need to disclose where you’re working currently, as well as any past employers that fall into the specified timeframe. That includes contact information for your supervisor or human resources, who most likely will be contacted to verify that you indeed work there as well as for how long and other details, such as your pay.

The fact is that at some places of employment you’re put on probation of some sort for the first while. That means your employment is as stable, which would create a problem with repaying the loan on time. Of course, this information about your employment history is taken into consideration along with other factors, so it alone might not be a problem if you’re at a new job and need a car.

Other Major Expenses

One of the things lenders are always concerned about when extending credit to someone is that they’ll get in over their head financially and can’t keep up with the payments. Much of the factors considered before approving you for any car loans in Toronto have to do with this concern, including asking about other major expenses.

If you have other large financial commitments, those affect how much you can reasonably spend on a car each month. After all, most people in a difficult financial situation would pay for their housing before they paid for their car. This is why lenders ask how much you pay for things like your home, court ordered payments, etc.

Your Down Payment

Any lender will want to know how much money you plan to put down on a car loan. This is a key factor not only in determining if you’re approved for credit, but also at what interest rate. Overall, people who put down more money up front are less likely to default on the loan, simply because they don’t want to lose the money they’ve already invested in the car.

Saving money to put down on a car loan is a wise move

You should be prepared to make the largest down payment you can reasonably afford. Some people will say that number needs to be 20 percent or 10 percent of the car’s price. In general, the more you put down the greater your chances of being approved for a loan, because you’re actually financing a smaller amount of money. It also often results in a lower interest rate, although just how much lower depends on your overall situation.


If you’re trading in a car you own when buying something new, that is absolutely a factor. The dealership will provide you with a trade-in quote after inspecting the car and assessing its market value. That amount goes towards the purchase of the new vehicle, so the lender want to know about it.

Think of your trade-in like another type of down payment on the loan. That’s exactly how it functions. The more you get for the trade-in, the more likely you are to be approved for the loan and the lower the interest rate, just like with a regular down payment. In fact, combining the two can really help.

Remember that trading your car in can come with some disadvantages versus selling it to another private party. You’ll get less money for the car because the dealership wants to turn a profit when it sells the car later. At the same time, selling the vehicle on the open market might take a few months, plus you’ll have to deal with potentially pushy shoppers.


A secure loan always comes with collateral, just in case you stop paying. With car loans in Toronto, it’s the actual car that’s the collateral. This is a big factor in approving a loan as well as determining the interest rate.

The lender will look at the present value of the car and compare that to the amount you’re looking to borrow. If you’re rolling things like gap insurance, sales tax, a service contract, etc. into the purchase price, that can result in you borrowing more than the car is worth, especially if you’re not going in with a down payment. Lenders get anxious about those types of situations, and understandably so. While gap insurance might help you cover the extra if you crash the car and total it, if you default the bank can’t recoup much of the total loan amount by selling the car.

Also consider the fact that plenty of cars drop in value quickly over a short period of time, especially new models. Certain brands and models are worse for this kind of depreciation in value, so a lender will want to know details about the car you’re looking to buy.

While it might seem uncomfortable to have your car as collateral for the loan, it could be worse. Unsecured loans, or loans without any collateral, typically come with a much higher interest rate. Think of credit cards, for example. Your car payments would be higher each month, or your might have to get a car which is less expensive.


While all this information about factors lenders consider before approving you for any car loans in Toronto might seem like a lot to process, it’s valuable. After all, buying a car is a significant financial commitment. Every little bit of leverage can help you get a lower interest rate, saving you some hard-earned money month after month.

Ignorance is most definitely not bliss. You don’t want to find out when you’re about to buy a car that some factor you didn’t even think would be considered has held you up from getting approved for the loan. That comes with some serious disappointment, which you might be able to avoid altogether.

By knowing there are some things you need to work on, you can go into the loan application process ready. Even if there’s nothing you can do about some of these items, it’s good to know ahead of time that they can affect your chances of approval as well as the interest rate you deserve.

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