How the Banks Decide if You Get a Car Loan


There are five factors that determine how the banks decide if you get a car loan:

  1. Work history and current income
  2. Debt and expenses
  3. Credit history
  4. The vehicle you’re getting a loan for
  5. The money you’re paying up front

In the next five minutes we’ll walk you through each one. We’ll also let you know some things you can do to make your finance deal more appealing to the banks.

Work History and Current Income

Your work history, combined with the amount of money you typically bring home every month, won’t completely determine whether you get a loan from the bank. Your work and income typically determine the terms of your loan, more than anything. Meaning, how long your loan is, and what your finance rate is.

Lenders prefer to loan money to people who have been in the same job for longer than two years. That being said, a lender isn’t going to have a problem with you just taking a new job that pays better than your last one. But if you’re the type of person who jumps around from job to job every couple of months, with a few gaps in your employment, that’s considered a red flag.

Why? Because most car loans last at least three years. They can go as long as eight years, but most sit in the 4-6 range. With this being the case, lenders are going to want to feel confident about your ability to hold a job and pay your bills every month for as long as you have your loan. The best way to make an assumption around this is by looking at your work history.

Your current income will also determine how much a bank will loan you. If you take home $2000 a month, they’re won’t be confident you can pay a $600 car payment every month. If you make $4000, that’s probably a different story.

In order to prove your monthly income to the dealership (and by extension, the bank) you’ll need to bring your most recent paystubs with you. Often, a lender will call your employer as well, to verify that you work there.

Our Advice: If you can’t get approved for the car you really want, based on your income, choose a more realistic vehicle this time around and then go for your dream car for your next purchase. Odds are you’ll be in a more secure financial position.

Debt and Expenses

Your income is only the first half of your financial situation when it comes to lenders. The other half is the amount of debt you’re carrying (and the kind of debt that it is). Typically, this is referred to as your debt-to-income ratio: the amount of money you owe as compared to how much money you make.

Debts and expenses can range from credit cards to previous car loans to mortgages to alimony and child care payments.

As with your income, there’s no magic number here that determines whether a bank will approve you for a car loan. But if you’re wondering how the banks decide if you get a car loan, debt is very important. The less you owe (and spend) the better, because this means more of your earnings can go towards the new car loan you’re looking for.

Think of it this way: if a bank is considering lending you $500 a month, they need to verify that you have that $500 to spend every month. If they think you do, you’re all good. If they think you don’t, then you’ve got some work to do to convince them otherwise.

Our Advice: Try to pay off your “bad” debts first. Yes, there is such a thing as good and bad debt. Good debt is a loan for something that will gain value in the future, like a mortgage for a house. Bad debt is for something that won’t gain value, like the clothes you bought with your credit card. Get rid of as much bad debt as you can, as fast as you can. The quicker you do this, the better your lender will feel. Note: Student Loans are considered a bit of a gray area. Not good debt, but not bad either.

Credit History

This is the big one, but it’s not the end-all be-all, as some people would have you believe. If you don’t have a stellar credit score, that’s okay. At My Ride, we approve Canadians for car loans with less-than-ideal every day.

Your credit history is a record of your previous loans and payment history. The official record of your credit history is what’s called your Credit Score. This is a score that’s anywhere from 300-900, and it measures how trustworthy you are as someone who’s looking to borrow money. The higher the score, the more likely you are to be trusted by lenders for car loans by the banks.

Your credit score basically comes down to your debt-to-income ratio and your bill payment history. But there are other factors, too. Like how long you’ve had a bank account (longer is better) and whether you’ve ever been taken to collections.

If you have a 700-score or better, you have nothing to worry about. Banks are very comfortable with those numbers. If you’re in the 600s, you’re most likely fine, but you’ll have to settle for slightly higher rates and a slightly smaller loan. If you’re into the 500s, many lenders will deny your loan application (but for the record, we don’t).

If you have declared for bankruptcy, you likely have the worst possible credit score. Bankruptcy only stays on your record for seven years, though. That being said, the credit experts at My Ride have approved many post-bankruptcy customers for car loans. So all hope is not lost!

Our Advice: Be realistic with your expectations. It’s rare that a person’s credit score will prevent them from getting a car loan. It simply prevents them from getting the one they wanted. If you’ve had some issue in the past and your score has suffered because of it, then consider a less-expensive vehicle this time around. The less you have to pay (with high interest) the easier it will be to make your payments and improve your score moving forward. Once you’ve paid off this vehicle, you’re likely to have a better score for next time.

The Vehicle You’re Getting a Loan For

The dollar amount of your car loan is determined by the car you want to drive, so this is a crucial step in the process. It’s important you make the right choice here.

The car you choose will determine how much you’ll have to borrow, how likely it is you’ll be able to pay your bill every month, how long you should be making payments, and the interest rate you’ll be paying. In other words: it affects everything.

But you live in the age of the internet, which means shopping for a car has never been easier and you have more choices than ever before. Take us, for instance. When you shop with My Ride, you have over 13,000 vehicles to choose from, from more than 40 different car manufacturers. Your options are almost endless.

You just have to choose the right car for your lifestyle, and most importantly, for your budget.

Our Advice: Get your loan approval first, before you decide on the car you want. With your credit approval in place, you’ll know the budget you’re working with before you even start looking. This makes things much simpler. The people who have problems with auto lenders are the people who are set on buying a specific vehicle. If you get your loan first, you’ll avoid unmet expectations and the headaches that come along with them.

The Money You’re Paying Up Front

It’s not necessary for everyone to put money down at the start of a car purchase, but it’s always a good thing. The more you pay up front, the less you have to take out a loan for. The less you owe, the lower your payments are. The lower your payments are, the more likely you are to pay them on time. The more you make payments on time, the higher your credit score.

Money down is a great sign for a lender. Not only does it mean they have to loan you less money, but it shows you’re capable of saving money.

If you put enough money down, you also guarantee you’ll always have equity in your vehicle. This will come in very handy if you decide to trade it in before you’re finished paying your loan.

Our Advice: Put down as much as you can, within reason. Even if it’s $500. Every little bit helps. Lenders love to see down payments up to 20% of a vehicle’s value, but that’s not realistic for most people. So just do what you can.

The Next Step: Get Pre-Approved for a Car Loan

Did you know that you can get pre-approved for a car loan without ever visiting a car dealership? You can do it all online, or over the phone. Once you have your pre-approval, it’s kind of like having a blank cheque to go buy a vehicle.

Stop worrying about how the banks decide if you get a car loan, and get a pre-approval from a lender like My Ride. Avoid the hassle, avoid the stress. We’ll let you know what you can afford, what your payments should look like based on your income and work history, and help you decide which vehicle works best for your lifestyle. We have 13,000 to choose from, so there’s definitely something you’ll love. And at a location that’s convenient for you.

We promise to make your shopping experience as convenient as possible. So get excited! Your approval is just around the corner.

Apply Now