How to Get Approved for a Car Loan with No Credit

By CanadaDrives

How to Get Approved for a Car Loan with No Credit


It can be difficult to get a car loan if you have bad credit, but many people can have an equally tough time if they have no credit.

We talk more about getting approved with bad credit in this article.

This doesn’t mean they don’t pay their bills, but that they’ve never borrowed money and proved to lenders that they will pay it back on time, and so financiers might not want to take a chance on them. It’s similar to applying for a job and being told only workers with experience will be hired, but no one’s willing to hire you so you can gain that experience.

Lack of credit is often an issue for younger people or new Canadians. There are steps you can take to prove yourself to finance companies and to help secure an auto loan. 

Some may take extra time, so if you’re thinking of buying or leasing a vehicle sometime in the future, start the process now. If you need a vehicle right away, you may have to use higher-interest loan providers.

Build up your credit

Apply for a credit card. It’s usually the easiest type of credit to access, and some banks have programs that specifically reach out to those who haven’t had one before. When you get it, make purchases that you can pay in full and before the due date. This will give you a favourable credit score and usually won’t accrue any interest. 

You could also try getting a line of credit at your bank, which can often be opened for a smaller amount as an unsecured loan, without collateral. If you get one, borrow small amounts and pay them back promptly to establish a credit rating.

If you’re wondering if it’s possible to buy a car with a credit card, earn reward points by doing so, the differences compared to a conventional car loan, and whether it’s overall a good idea or not, read our article: Can You Buy a Car With a Credit Card?

Get your documents in order

You’ll need proof of employment, such as pay stubs. Make a list of addresses where you’ve lived in the past few years, and if you paid rent, include the receipts for it. Include copies of any bills you pay on a regular basis, such as phone or utilities. 

Add anything that might be helpful, including your bank account statements. You’re establishing a pattern to show a lender that you have steady income and a history of making regular payments on your bills.

Save for a down payment

Aim for the largest down payment you can afford to put together. Lenders like to see this and it will reduce the amount you need to borrow. The larger the down payment, the lower the monthly payments, which in turn will be easier to pay off.

Be realistic about the vehicle you want

Since there’s no credit record to check, your lender will want to minimize its risk. Asking for a lower amount improves your chances, so this isn’t the time to look at a premium model, a luxury 7-seat SUV, or a full load of options. 

That can come later as your financial profile grows. Of course, the purchase price is only the beginning, so be sure you can afford the monthly loan payment and the ongoing cost of car insurance, fuel and maintenance.

Look for a co-signer or guarantor

Having someone cosign or guarantee the loan may make it easier for you to get approval. This person is jointly responsible with you for the loan’s repayment.

The two are similar but with minor differences. A co-signer is usually named as co-owner of the vehicle under the loan. A guarantor usually isn’t and is only guaranteeing the debt. In most cases, if you miss a payment or otherwise default on a co-signed loan, the lender asks the co-signer to make the payment. 

With a guarantor, the lender will usually exhaust all possibilities of getting you to pay before approaching that person. A lender will only accept co-signers or guarantors with a good credit rating who would qualify for such financing on their own. 

No support? Here’s the best way to get a car loan without a cosigner in Canada.

Consider different types of lenders

Start with the bank where you have your accounts, as you’re already known to them. Since you’re a customer, they’ll try their best to get you approved, especially if your accounts are in good order and you haven’t been overdrawn.

Car dealerships will have access to several types of lenders, which can include the banks they deal with, the auto manufacturer’s financing divisions, and third-party finance companies. The dealer wants your business and will also work to secure a loan for you.

If you can’t be placed with a regular loan, sub-prime is an option. The dealer will help arrange it, or you can approach one of the numerous private Canadian lenders specializing in it. 

However, the interest rates are high, and the amount you owe quickly multiplies if you spread the loan over a long period. Use sub-prime as a last resort, and shop around to see who’s offering the best interest rates.

Watch your credit score

If you have a high-interest loan, check your credit score regularly as you pay it back. As it improves, you may become eligible for lower-interest loans. Talk to your bank about refinancing – a new loan to pay off the higher-interest loan. You will probably be charged a fee for early payout, but it’s likely the new loan may still cost less in the long run with its lower rates.

It isn’t always easy to get a loan, but don’t give up. There are numerous options and one of them may be the opportunity for you.