How Much Auto Financing Can I Qualify For?

How Much Auto Financing Can I Qualify For?

Buying a car is a huge deal for most of us. Given that we live in a society in which it’s almost impossible to function without a working set of wheels, the significance of owning your own automobile is difficult to overstate. For one thing, it’s going to be the only way you can get yourself to and from work, generally speaking. For another, it’s probably the most tangible representation we currently have of freedom itself. Think about it: all you need is a car and a road and you can go anywhere in the entire world you’d like to. There are very few other items which epitomize liberty to the same extent.

The First Step

For still another reason, though, cars are a great purchase because it’s the best possible way to get your financial adult life started. Just about every major purchase you’re going to find yourself making is going to require a credit history to some degree. Houses, televisions, cars—all require proof that you can keep up with the financial obligations you’ve undertaken, and that you’re a reliable person to lend money to.

Given that they pale in monetary value compared to homes, taking out a loan on a car can be an excellent way to get started when it comes to building up a line of credit for yourself. The monthly value of the loan you’ll have to pay off is never going to be at the same level as mortgage payments, and the seriousness of defaulting on a car loan (while by no means ideal) is similarly incomparable. If you’re interested in financing a car in Toronto, there are a few things you need to keep in mind.

One of these is the terms of the loan you’ll be offered, which can vary according to a couple of fundamental factors: interest rates and length of the financing scheme. We’ll discuss those briefly in a moment. The other big thing you need to be able to work out is how much auto financing you’re actually able to qualify for. As well as playing a big role in determining your budget, when it comes to car financing in Toronto the specific amount of money you can expect to get is going to be of major significance.

But before we get into a detailed analysis of exactly how much auto financing you can qualify for, we first need to have a quick discussion of how exactly loans work, what your credit score is, and how those independent variables are going to combine in order to give you the loan as a whole.

What Are Loans, Really?

Man reading a business newspaper.

Loans are the bedrock of modern financial society. Money itself is made by the creation of debt, and indeed it’s difficult to think of a major decision you can make which isn’t going to require a loan to some degree. In theory, the process is straightforward—somebody (a lender) gives you (a buyer) a certain amount of money, with the promise that you’ll pay back the money over a period of time in a manner that’s manageable given your current income and living situations.

Sounds great, right? To us here at carloans.ca who are concerned with what it takes to secure car financing in Toronto, it certainly does. But if you were giving somebody money, wouldn’t you want something a little stronger than their word to ensure you get the amount you’re due at the end of it all? That also makes perfect sense, and that’s where credit comes into the picture.

Your Credit Score

A laptop displaying financial data.

Your credit score is a three-digit number—insignificant enough on paper, but crucial when it comes to real life—that acts as a tangible, algorithmic representation of how likely you are to pay back the money, which in turn provides a guideline for framing the amount of risk the lender should be prepared to take on. If you’re just starting out on your journey of financing a car in Toronto, you could well not have a credit score at all. After all, none of us are born clutching our Experian or TransUnion statements in our infantile hands.

Whether you have a score already or don’t, however, the procedure for building up a great score is exactly the same. For starters, the most heavily waited item in the overall calculation is your history of paying back your debts in full and on time. This is difficult to do for a lot of us, but if we’re accustomed to living within our means (or if we’re not but have had to drastically adapt our lifestyle in order to make it work) there’s no reason it shouldn’t be possible. Now we’re going to put a few pieces of the puzzle together in order to arrive at a conclusion.

Given that your credit score is, basically speaking, your track record of paying back your debts in full and on time, it stands to reason that the better the score is, the more likely you are to pay back everything you owe. And the more likely you are to pay back everything you owe, the less risk is taken on by the lender considering you for car financing in Toronto. Conversely, if you have a poor credit score it likely indicates a poor history of paying back your debts—whether that’s because you don’t always pay the full amount on the bill, or because you do always pay the full amount on the bill but you’re not always dead on the nail when it comes to timing, is unfortunately immaterial. All that matters is the total history, for the lender and, by extension, for you as well.

How Loans Can Be Affected By Credit Score

So now we understand that credit scores factor into how much risk the lender is undertaking by considering you for car financing in Toronto. But how does this practically translate into tangible terms of the loan agreement itself? There are two ways, as we referenced above: interest rates, and the length of the loan. We’ll briefly describe those now.

An interest rate is an added amount of money the buyer is expected to add on to their monthly repayments. Unlike the rest of the payments, which go towards the value of the item itself (in this case, the car you’re trying to finance in Toronto), money paid as interest has nothing to do with the car’s value. Interest rates are solely a way to offset risk: think of the money you pay as interest as going straight towards the peace of mind of the lender. When we understand this, it’s not hard to realize that the worse your credit score, the higher your interest rates will be; and the better your credit score, the lower the interest rates you’ll be offered are. It makes sense: if interest rates are directly correlated to your credit score, which itself is directly correlated to your history of paying back your debts, this relation seems obvious.

The second main way the loan will be affected by your credit score is the length of the loan itself. The worse your credit score is, the longer the loan will have to be. This isn’t as immediately obvious as the interest rates, though, so we’ll briefly explain what we mean.

When you’re paying money towards a car financing plan in Toronto, you don’t yet own the vehicle. Granted, you’re free to drive around in it and use it for whatever you like, but in concrete, fiscal terms, it’s not your car yet. Now imagine that your car is going to need repairs. This shouldn’t be too difficult to imagine, given that automobiles are fickle, incredibly complicated machines, and sometimes things just go a bit awry. If the length of your loan is shorter, it’s more likely that you’ll have the car fully paid off by the time you have to stick it in the shop.

On the other hand, a longer-term loan increases the probability that by the time your car needs repairs, you haven’t got it fully paid off yet, and as a result you’re paying money to fix an item that isn’t even your own. Sounds a bit nuts, right? But that’s exactly the point of varying the length of the loan terms, when it comes to the dealer’s perspective, and financing a car in Toronto is no exception.

How Much Financing Can You Expect?

A man holding some money.

Now that we have at least a cursory understanding of how credit, interest rates, and the length of the loan itself all play off each other when it comes to conceiving a car financing in Toronto plan as a whole, it’s time to get down to the brass tacks. How much car financing can you actually qualify for?

We’ve decided to break credit scores up into a few different categories, and use those to list how much financing you can expect to receive. In order to guesstimate how much financing you’re going to qualify for, simply find your score in the ranges on the left and have a look at the corresponding values.

  • <530 will qualify you for a loan which is going to take 15% of your gross monthly income in monthly repayments, and incur a debt to income (DTI) ratio of less than 35%
  • 531-590 will qualify you for 15% of your gross monthly income in monthly repayments and a DTI ratio of less than 40%
  • 591-650 will qualify you for 17% of your gross monthly income in monthly repayments, and a DTI ratio of less than 50%
  • 651-720 will qualify you for 20% of your gross monthly income in monthly repayments, and a DTI ratio of less than 50%
  • 721+ will qualify you for 30% of your gross monthly income in monthly payments

It’s worth noting that for the final category, DTI ratio doesn’t come into it because you’re so trustworthy that the lender will allow you to make use of any reasonable monthly repayment scheme. The DTI ratio is just a way to keep the lesser scores on track, and to ensure that they can make their payments as well as possible without incurring unnecessary risk for the lender.

As you can see, you’re going to be able to spend much more of your gross monthly income on car payments if you have a better credit score. This, in turn, is going to translate into more money you can feasibly spend per month on the loan, which is going to translate into a higher overall value of the loan, which means a better car financing plan in Toronto for a more expensive automobile.

Summary

We hope this article has helped make the matter of how much car financing you can qualify for a little more straightforward. Obviously, there’s no one-size-fits-all solution, but the above ranges can serve as a reasonably reliable guideline to help you conduct your own research in accordance with your specific situation.

If you’ve been struggling to secure auto financing because of your credit score, give us a call here at carloans.ca. We take a serious look at every application we receive, no matter what your actual score is.

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