What Car Loan Do I Qualify For?
As you search for a car loan in Ottawa, it’s completely normal to worry about what you’re going to be qualified for. After all, lenders do take a close look at many different factors from your life, details you normally don’t disclose to anyone, before deciding if they’ll approve you for the loan.
The process of applying for any loan can be nerve-racking, especially if it’s for a car. After all, having your own transportation is a means of independence. While you could buy a really old car using cash, it would come with big repairs that cost even more and that interrupt your daily routine.
Since you have so much riding on any car loan for Ottawa, it’s best to just know what can affect your application. Below, you’ll learn more about these many factors so you have a better idea about your likelihood to be qualified. However, remember that lenders will change their standards often without announcing it to the public. This is why working with a car broker or someone else who really knows the lenders and what they’re looking for in an applicant can definitely help.
What You Make
Whenever you fill out an application for a car loan in Ottawa or other cities throughout Canada, there’s a spot that asks for your income. This is a key factor, because lenders don’t want to give you a loan that’s too large for you to handle.
Some people aren’t very responsible with their money. They might think they can buy an expensive vehicle and make the payments, not considering that emergencies come up in life and that they have other expenses. This is why lenders want to know what you make each month.
Not only will you have to disclose what you make on the application, later you’ll need to prove it. Paystubs, bank statements, or some other verifiable method of showing what you make regularly will be required. This is to guard against fraud and is as much for your protection as it is for the lender’s.
Your Major Expenses
Lenders won’t be satisfied to just know how much you bring in on a monthly basis. They also want to see what other big expenses you are committed to paying regularly.
This can include items like your housing, large loans, alimony, child support, and even what you owe on other car loans. Exactly how detailed the information a lender will want really depends on who you’re applying for a loan from.
Each lender has its own formula to figure out how much of your income can go toward major expenses, including a car. You might have heard from friends of family that no more than something like ten or twenty percent of your monthly income should go to a car loan, but a lender might not follow that standard. It just depends on the whole situation, but your major monthly expenses are absolutely a factor. This is where trying to live frugally can really pay off.
It seems like pretty much everyone these days is keenly aware that what’s on their credit report directly affects any credit application they send out. This includes a car loan for Ottawa and anywhere else in Canada.
Also called your credit history, your credit file contains all kinds of information about your credit lines and what you do with them. Lenders will report if you pay on time, as well as if you pay late and how long past the deadline you submit payment. If you skip payments on a loan that will also be recorded. Even worse, defaulting on a loan will be logged in your file, as are any collection actions. Nobody is perfect, so having a few late payments isn’t necessarily the end of the world, but the more negative payment history items you have the worse your chances of being approved for a loan in the future.
Your credit file also contains all the loans you currently owe, including the name of the creditor and the amount of money you’ve borrowed. When you apply for a car loan in Ottawa at a car dealership, bank, or anywhere else, the lender will look at that information closely. They want to be sure you can keep up with all the debts you owe. After all, if you take on too many lines of credit for your income, you could become overwhelmed and not be able to make the payments on time or at all.
While the content of your credit file is certainly something lenders will consider before qualifying you for a loan, just as important is your actual credit score. Most people have no idea that they have multiple scores, many of which you don’t have direct access to. When applying for a car loan, a lender will pull your automotive credit score and that number will impact the likelihood that you’ll be qualified for the loan.
In Canada, credit scores run from 300 to 900 points. The higher the number the better. Lenders all have their own standards for what score they want you to have as a minimum to qualify you for a loan, but some won’t really let that information out for the general public to know. Others will be more upfront, which is nice if you have damaged credit or are just starting out establishing your credit history.
A credit score is calculated using a complex algorithm. It draws off certain information from your credit file, combining it and spitting out the seemingly magical three digit number. Essentially, it’s a representation of how you use credit, at least in theory. A lower score means either you haven’t used credit enough to prove your worthiness or you’ve had significant trouble in the past. Lenders will treat you with suspicion and caution if you have a lower score. If you are qualified for a car loan in Ottawa, it will probably be at a much higher interest rate as a way to compensate for the risk the lender is taking on.
Because there are people who would take advantage of the information, credit bureaus won’t disclose exactly how your credit scores are calculated. The more recent an item in your credit history, the more it will affect your score for better or worse. Larger lines of credit make a larger impact on your score. Late payments and non-payments can be quite damaging, while a bankruptcy that’s not too old as well as collections and judgments can really drag down your score.
Your Employment History
Not only will a lender what to know what you make and where you’re working now, they’ll want at least a brief history of your employment. Exactly how far back you need to disclose where you’ve been working really depends on the lender’s standards, with some asking for information two or three years in the past.
You’ll need to supply not only the name of your employer, but also what your pay was, plus a contact in the company. Usually, you need to supply a manager or the number for the human resources department. The lender might call and verify when you worked there and how much you made, ensuring you’ve been on solid financial ground for some time.
This verification will also uncover if you’re new on a job, something that could hurt your chances of qualifying for a loan. Many employers have a probationary period of new hires, which means your monthly income could become zero in the near future. That’s a risk many lenders won’t want to take.
What You Put Down
Don’t forget that going in with a down payment on your car loan in Ottawa is a good strategy. While there are zero down loan programs, they involve much more risk for the lender, meaning the interest rate will be higher.
Just how much you should put down largely depends on your financial situation. Sometimes you need to buy a new car on emergency, like if your old car was totaled in an accident. In that situation, hopefully you have a savings you can draw on to make at least a small down payment. If you haven’t been setting money aside, you’ll have to take your chances with a zero down promotion.
The larger the down payment, the better the interest rate you will receive, at least to a point. When you put money down, you’re borrowing less from the lender. That means less of a risk on the loan. Also, most people don’t want to default on a loan where they’ve put some of their hard-earned savings down, so lenders consider larger down payments a sign of lower credit risk. That, in turn, can trigger a lower interest rate, which is a huge help.
People have all kinds of personal rules about how much you should put down on a car loan. You can formulate your own, but just know that putting down as much as you can reasonably afford is a good move.
If you’re buying a car through a dealership, and even if you’re not, you might be trading in a car. There are dealerships which will buy your old car whether or not you’re buying one from them. A lender will want to know if you are trading a car in, because that will affect your down payment.
Most people don’t think of their trade-in as a down payment, but unless you owe more than the car is worth, that’s exactly what it is. A trade-in is a good way to increase what you can put down when applying for a loan, just in case you can’t spare as much cash as you would like.
A dealership will want to assess the condition of your car before offering you a certain quantity of money to buy it. This amount will always be less than what you would get if you were to sell the car to a private party. Just remember that selling the car to another person usually involves months of being hassled by car shoppers who may or may not show up for appointments they make, plus negotiating on the price. It’s your choice whether or not you want to trade in the car or sell it privately.
The Car You Are Buying
It might sound odd, but the car you’re trying to get a loan for so you can purchase it will absolutely affect your qualification. If you’re pre-qualified for a car loan in Ottawa, the exact details aren’t exactly set. It provides an approximation of what you’ll finally be qualified for, partly because the lender wants to see what car you select.
Cars lose value over time, with rare exceptions. If you stop paying your car loan, the lender can send a tow truck to take it away, then sell the car to recoup part of the amount you owe. When the value of the car has plummeted, the lender is left with less money it can try to collect from you. Some cars tend to lose their value faster, depending on the year, make, and model as well as the condition. This is why lenders want this information before qualifying you for the loan.
What car loan you qualify for is affected by several different items which lenders use to measure your creditworthiness. The best thing you can do is be aware of these factors and do everything you can to improve them before applying for a loan.
If you’re deemed a higher credit risk, the interest rate on your car loan will be higher. That increases your monthly payment automatically, which means you have to buy a cheaper car to stay within the monthly spending limit imposed by the lender. By having a good credit score and relatively clean credit file, you can get a nicer car or spend less each month for the same car.