What Credit Score Is Needed For A Car?

Getting a car is worth it if you need to commute, have a family, or want to have more convenience when it comes to transportation. While prices have started to drop from their all-time highs, most Canadians budget for a car well in advance. When you're looking for ways to finance this expensive purchase, you may realize the importance of your credit score for financing a car.

A credit score is an essential component of getting a car loan. Banks, credit unions, car dealerships, online lenders, and other companies that provide financial services use your credit score to determine whether you can get approved for a loan. Your credit score also influences the interest rates, repayment periods, and overall chances of approval for a car loan.

It can be challenging to navigate the relationship between your credit score and your ability to fund your dream car. This article teaches you the basics of credit scores, the minimum credit score required for car financing, how creditors assess creditworthiness, the types of car loans available, and tips for improving your credit score.

What is a credit score?

A credit score is a three-digit number from a credit bureau based on your credit history and behavior. It assesses your credit utilization ratio, payment history, and credit accounts. Financial institutions use your credit rating to approve you for loans and predict the likelihood you'll make monthly payments. Your credit score also impacts the interest rate you get on your car loan. Higher scores typically result in lower interest rates, while low ones may result in higher interest rates.

What's a good credit score in Canada?

According to Equifax, a good credit score in Canada ranges from 660 to 724, and a perfect credit score is 900. A good credit score can improve your chances of getting a car loan and finding competitive interest rates. Competitive interest rates help with cost savings on monthly payments as you'll pay lower interest on the car loan.

Minimum credit scores needed for car loans in Canada

The minimum credit score needed for a car loan in Canada varies depending on the bank, credit union, online lender, or other financial institution. Traditional lenders tend to have a higher minimum requirement compared to online lenders. The average credit score you need for a car loan at a bank or credit union typically ranges from 600 to 650. Online car loan providers may have a lower credit score requirement, such as starting from 300.

How do credit scores influence car loans?

With a higher credit score, lenders are more likely to approve you for a loan and offer a lower interest rate. A high credit score shows you're a responsible borrower with good financial health, making you less risky as a borrower. Lenders may think approving you for a loan is more risky if you have a low credit score. If you get approved, you typically have higher interest rates, which means borrowing money is more expensive.

Bad credit can also be a red flag as it may indicate poor financial habits, such as not paying bills on time, excess debt, or past bankruptcies. Even if you don't have good or excellent credit scores, you may still be able to get credit approved for an auto loan. For example, you can visit an online lender with lower credit score requirements. You can also increase your credit score to improve your financial health.

Working on your credit scores

A bad credit score isn't the end of the world as you can always work towards improving it. It takes time to develop healthy financial habits, but discipline and consistency can help increase your chances of success. Whether you need a car loan or a loan for a down payment, higher credit scores mean you have a better chance of getting approved for a loan at a cheaper rate. It's worth it to always look out for ways to improve your credit rating to help you secure better financing opportunities for your purchases.

Here are some ways to improve your score and fix bad credit:

Review your credit report

Regularly checking your credit report ensures your information is up-to-date. Ensure your personal information is accurate and there aren't any accounts you don't recognize. Reviewing your report also shows your overall financial health and status, giving you an idea of whether you're on the right track towards your goals.

You can get your report from a financial institution or a credit bureau. For example, you can check your free credit score from KOHO and get valuable insights into why your score changed. Use these insights to improve any areas of improvement and how you can increase your score.

Monitor your payment history

Your payment history is an essential component of your credit score. Financial institutions and lenders look at how often you pay your bills and whether you pay them on time. You can improve your history in several ways:

• always pay your credit card and other debts on time

• make at least the minimum payment required

• contact your lender if you can't make timely payments

• don't skip a payment even if your bill is in dispute

Use your credit wisely

Keeping your credit utilization ratio at a minimum can help improve your credit score. If you use a big percentage of your credit limit regularly, lenders may see you as a bigger risk as a borrower and are less likely to give you a loan. If you make larger purchases with your credit card, try to pay off the amount right away from an everyday banking account. Aim to have a credit utilization ratio of 30% or lower each month.

Improve your credit history

The longer you have an open and in-use credit account, the better it is for your score. It shows credit bureaus you can responsibly manage your debt by making on-time payments and controlling the amount of credit you have. Consider keeping old credit accounts open even if you don't use them anymore. The record stays on your credit report, which can benefit your credit score.

Can I get a car loan with bad credit?

Bad credit scores can happen to anyone, and you can still get a car loan with bad credit. While it may be more challenging for you to get a car loan approval with a poor credit score, there are options you can consider. Most lenders, especially traditional ones, want to see a higher credit score to approve you for a new car loan. However, some lenders specialize in helping people with lower credit scores. These lenders help you find suitable loan terms that work with your situation. They also assess additional factors like your personal finances and income to assess your ability to qualify for a car loan.

Other ways to help you buy a car with a bad credit score

While you can still get a loan with bad credit to buy your car purchase, there are also other options to consider if you don't have the ideal credit score. You can find different ways to finance car purchases, such as using cash, leasing, spending your savings, or getting a personal loan.

Cash

You can pay your car in cash if you have the money and want to do so. You don't have to worry about your credit score or getting approved for a car loan because you'll pay for it upfront. You don't have to worry about monthly payments or interest rates if you pay cash for your car. It may be a good option if you already have other car loans or credit or are worried about making timely payments.

Leasing

Leasing is an agreement to borrow a car from the dealership for a fixed period at an agreed amount of money. You typically make monthly payments, which include the principal, interest, and taxes. Leasing a car is usually cheaper than taking out a loan to finance a car because you're paying you're only paying for the depreciation value of the car while you drive it. Leasing a car builds credit because a good payment history can lead to lower monthly payments and more favourable rates.

Savings

Since buying a car is a big purchase, it's always a good idea to start saving for it in your budget ahead of time. Look at your finances to determine how much you can afford, and set aside some money monthly towards this goal. Having a savings goal can make buying a car more achievable as you have time to work towards getting the funds. It can help lower the auto loan amount you need, saving you money on payments and interest.

Personal loan

A personal loan can be helpful because they are typically unsecured. With a car loan, the vehicle you buy is the collateral for the loan. You also have more flexibility with a personal loan in terms of the type of vehicle you want to buy, as there can be restrictions on the type of vehicle you can buy with a car loan.

How to increase your chances of getting an auto loan approval?

You have several ways to increase your chances of getting approved for a car loan, especially if you have a lower credit score. It's important to do extensive research into the car loan market to understand your options and which is the best for your situation.

Bring a bigger down payment to the table

Making a bigger upfront payment can increase your chances of getting a car loan approval significantly. Lenders find you less risky as you'll borrow a smaller amount. Taking out a smaller loan also means you can decrease the overall cost of borrowing money as it lowers the amount of interest paid on the loan and your repayments.

Find a co-signer

A co-signer agrees to pay your debts if you default on the loan or can't make payments. They usually have good or excellent credit scores with reliable payment histories. Getting a co-signer on your auto loan can make it easier to get approved because the lender has someone to go to in case you run into trouble. Choose someone you rely on and ensure they understand the responsibilities of being a co-signer.

Shop around for better deals

Just like choosing the right insurance provider, it's important to find a suitable lender. Look at the car loan market and find a financial institution or lender with the loan terms and rates you want. You can speak with as many lenders to understand what they can provide you based on your credit score and financial health.

Build better credit with KOHO to help you purchase your dream car

If you're in the market for a new car and are worried about getting a car loan approval, you can build your credit with KOHO to increase your chances. KOHO offers three ways for you to work on your credit rating. You can use a KOHO line of credit, use a secured line of credit, or supercharge your credit with both.

KOHO also offers a virtual credit card with guaranteed approval to help you spend and save instantly while earning up to 6% cashback. Whether you're travelling or shopping online, you can easily reach for your virtual card without pulling out your wallet. You can sign up for overdraft protection coverage to get a cash advance of up to $250 if your limit in emergencies.

If you're looking to further your financial health to put you in a better position for the future, you can also consider the KOHO High-Interest Savings account. Earn interest and cashback rewards with no minimum balances or NSF fees.

Whether you're looking to improve your credit score, get financial protection, or save for the future, KOHO can help you build a stronger financial foundation.