It can be challenging to get a loan as a first-time car buyer because first-timers often don’t have strong credit histories. Luckily, there are several things you can do to help you get a car loan.
Build credit
As a first time buyer, you’ll need to establish some type of credit history to get a traditional car loan. The best way to do this is to establish credit with a company that makes monthly reports to the top credit information agencies. For instance, department stores will often offer credit cards to people without any credit. Once you’ve established a history (you need six months minimum), you will have an easier time applying for a car loan.
However, in addition to building credit, you also need to make sure you’re building good credit. This means that you need to make sure to make your credit card payments on time. By paying off monthly instalments in full, you will establish an acceptable debt to income ratio. This is something lenders look at when you apply for a loan. Furthermore, make sure you spend below 50% of your limit, as this is something lenders also look at.
- Research lenders
Various lenders offer a variety of interest rates at different times. For this reason, you must find the lender that has the best rate at the time you’re looking to buy your first car. Luckily, various sites on the internet connect you with loan providers and allow you to look at a car loan application online.
Get pre-approved
Before you go car shopping, it’s best if you get pre-approved. There’s nothing worse than finding a car you love, only to discover you aren’t approved for a loan amount large enough to finance it. Going through the pre-approval process tells you exactly how much of a car you can afford. Furthermore, getting pre-approved doesn’t mean you have to go with that lender, so if a better deal comes along, you’re free to take it.
Choose an appropriate car type
As a first-time car buyer, you may find it difficult to get the financing to afford a new car. Therefore your best bet is to look at a used vehicle. A lot of manufacturer’s authorized dealers have used car lots where they offer inspected and warranted used cars. Dealers prep these vehicles so they are both operationally sound and cosmetically appealing. Dealers will also usually provide limited warranties on these cars. That being said, lenders usually won’t finance cars that are more than five years old or that have more than 50,000 km on them.
Prepare documentation
When applying for a car loan, make sure you have all the necessary documentation in place. You will need to provide proof of income, as well as financial statements. Lenders will also want to know about any other loans or debt obligations you have. Additionally, you will need to show proof of residency and insurance.
Have a down payment
In general, first-time car buyer loans require the borrower to offer a minimum 20% down payment. This is known as a secured loan. In this way, the car you purchase acts as collateral for the loan since you have a 20% equity stake in the vehicle that you will want to avoid jeopardizing, making it less likely that you’ll default on the loan. At least, this is what lenders believe. Furthermore, the larger the down payment you make, the less risk the lender takes, and the more favourable your loan application will be.
Summary
It can be both exciting and intimidating to shop for your first car. However, the car loan process can take the wind out of your sails if you’re not prepared. Therefore, you need to make sure that you have a good credit history, find the right lender, get pre-approved, choose to buy a used car, prep the proper documentation for your application, and have enough money for a 20% down payment. If you do all these things, you should have no problem getting a loan as a first-time buyer in Canada.
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