Factors That Affect Your Car Loan Approval

Mike Page
Authored by Mike Page
Posted Monday, July 27, 2020 - 5:05am

Getting a car loan can be considered as a significant personal investment. There can be several important reasons why you want to buy a car and why you need a car loan if ever your current financial resources are not enough to get one. Car loans are a popular option for people these days as it helps them secure their purchase faster than accumulating their savings to buy a car. However, securing a car loan approval can have varying requirements depending on the financial institution or loan provider offering the service. Here, we’ll discuss some of the factors that can affect your car loan approval to help you get your loan faster.

Credit Score

Your credit score carries with it a wide implication when it comes to your loans and purchases. Your car loan will not be an exception. This is a piece of vital information that lenders, banks, and other financial institutions look into to check how creditworthy you are. Also, the status of your credit score can determine how much money these establishments are willing to lend and the conditions that come with the loan and its repayment, such as interest rate.

The good news about car loans is that there are car financing services and establishments that have lenient policies when it comes to credit scores. A good point shared by RightRide Canada is that cars are essential modes of transportation and people should have better access to cars and be offered payment options that they can manage and fit their lifestyle. More and more car financing institutions are shifting toward this line of thinking, which is a good development for those who have been denied by traditional banks and lenders.

Down Payment Size

This is a factor most car loan applicants commonly overlook. Just because you are applying for a car financing service, it doesn’t necessarily mean that the financing institution shouldering a large bulk of the car payment is a good thing. Increasing your downpayment reduces your loan amount, which carries less risk for you and the lender - a win-win situation. Also, your approval can be influenced based on the size of your downpayment. If you have a high downpayment, car financers will see it as a sign that you are willing to complete the loan repayment and will not stop making payments and risk having your car repossessed. Lastly, a large downpayment will also mean favorable offers and repayment options.

Debt-to-Income Ratio

Lenders, banks, and car financing institutions will look into your DTI information to assess if you are able to handle a new debt efficiently. These institutions will look into your overall debt in relation to your income over a certain period. The calculation of the DTI (expressed as a percentage) involves the addition of all your monthly debt payments (student loan, mortgage, credit card payments, and child support), then dividing this sum by your gross monthly income (the amount in your payslip before taxes, deductions, and contributions are deducted). 

Ideally, a good DTI ratio should be below 36%, with the percentage allocated to servicing mortgages not higher than 28%. For example, let’s say your monthly gross income is $5000. The 28% maximum amount for mortgage payments should be $1400 ($5000 × 0.28 = $1400). A DTI of 36% following the same example gross income should be $1800 ($5000 × 0.36 = $1800). Having a high income doesn’t necessarily mean you’ll have a good DTI ratio and a good car loan terms. If you have a high income but also a high DTI ratio, it will make your car loan approval suffer. You may still be approved for a car loan, but you will have a low loan amount and have less favorable terms offered to you.

There can be several important factors that can affect your car loan approval. While having a car can be considered as a necessity, it also involves planning and preparation. You need to present yourself as a reliable borrower or loan applicant by getting the factors discussed above under control. There may be other factors not mentioned here, and we encourage you to do diligent research before making your decision. After all, being informed can empower you to do be more prepared and get a successful car loan approval.


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