There’s good news and bad news for Canadian buyers shopping around a new car. The good news is that there’s no threshold credit score for taking out a car loan. The bad news is that borrowers with low credit scores pay higher interest rates, meaning that their vehicles cost considerably more by the time they pay off the principal amount of the loan and interest.
Learn About Credit Scores
When buying a new or used car, your credit score is a major factor in these transactions. For instance, dealerships will check your credit score before financing a vehicle in your name, while financial institutions define the terms of your loan, based on your credit score.
Although a low credit score wouldn’t stop you from buying a car, you might have to pay a higher-than-average interest rate on your loan. However, once you build up your credit score by making sure every instalment is paid on time, there is a possibility that you could refinance your vehicle a year or so down the line, at a better rate.
This is why you should know what your credit score is before you start dreaming about your new wheels. This gives you a better idea of whether you need to save up for a larger down payment, find a co-signer, or seek loans only from lenders specialising in low-credit transactions.
Remember: the lower your credit score, the more limited your options as a borrower.
Credit Scores for Car Loans
Although there are several scoring models used in Canada, the final scores are all comparable. They range from:
- Excellent: 760 – 900
- Very Good: 725 – 759
- Good: 660 – 724
- Fair: 560 – 659
- Poor: 300 – 559
Here’s how the credit scoring system works for auto financing in Canada:
- A GOOD score of 660 upwards will qualify you for a car loan at most dealerships;
- A FAIR score of 560 to 659 might raise a few financial hurdles in your car loan quest;
- A POOR score of under 600 channels you to a lender specialising in low-credit financing.
Stepping-Stones For Auto Loans
But no matter the colour of your credit score on the rainbow scale, auto financing is today available to all prospective car buyers in Canada. Here are a couple of shortcuts for financing your new wheels faster and at lower cost:
- a down payment in cash (the larger the better) boosts your chances of approval, by lowering the amount you need to borrow (while also indicating the ability to save and manage your money sensibly);
- a co-signer (in good standing within the community) lessens lender risks, making it easier to get that stamp of approval on your application.
Even prospective buyers without access to these options can still finance their cars, by choosing lenders willing to accept higher levels of risk.
Building Back Your Credit While You Drive
An unexpected benefit of auto financing is that it helps rebuild your credit quite quickly. In fact, your credit score may start to rise within a couple of months – provided that you pay off each instalment promptly and in full.
This is why it’s important to stay well within your budget when choosing a car. When unexpected expenses strike (and don’t they always crop up at the worst possible time?) you must be able to meet your repayment obligations.
Remember: 35% of your credit score is based on your payment history track-record.
Get Your Credit Report Free!
Thanks to the Internet, checking your credit score is both free and fast. Checking your credit with a site like Borrowell won’t harm your credit at all, and you can download your credit report immediately.