What are the minimum requirements to get approved for auto financing in Canada? Can you get a car loan without a job?
While it is possible, getting approved for a car loan when you are unemployed will be much harder than if you can show proof of steady income.
Keep on reading to find out how to apply for a car loan without a job and what factors you need to keep in mind when comparing lenders.
Getting Car Finance Without a Job
Whether you are a student, a newcomer to the country or have just lost your job, here are a few ideas on how to get auto financing.
Bear in mind that not all tips will work for your situation, which is why you need to consider each one carefully before trying it out. The last thing you want is to get rejected by a lender—this will impact your credit score and it might take you months or years to build it up again.
Get a Co-Signer
Getting someone to co-sign your loan is usually the easiest and most straightforward way of getting a car loan with no job history. The co-signer is usually a member of the family or partner, but in reality, it can be anyone with a stable income and good credit score.
Who is this option for: If you have friends or family with a great credit score willing to help you out while you are in between jobs or down on your luck, this can be a great option. It is also one of the most common options for students in need of a car.
What are the downsides: Someone cosigning your car loan is a pretty big favour as they will be responsible for paying off the remaining balance should you default on payments. If you want to keep having a good relationship with that person, make sure you pay loan instalments regularly.
Related article: Everything You Need to Know About Car Equity Loans in Canada
Show Proof of Other Income
If you have other documented sources of income, you could use these to qualify for a car loan. Lenders want to see that you’re able to keep up with your payments, so they are willing to accept other forms of steady income.
Who is this option for: The lender is likely to consider any of the following instead of a pay stub:
- Self-employment (including freelance work or side gigs)
- Child support
- Alimony payments
- Disability payments
- Trust fund payments
- Spousal support
- Investment dividends
- Rental property
What are the downsides: There is no guarantee that a lender will accept alternative income instead of a regular salary, thereby rejecting your application. Even if they do, chances are they will see you as a high-risk borrower and offer higher interest rates and additional fees.
Come up with a Sizable Down Payment
Putting down a larger deposit for the car you want to purchase is one of the surest ways to get approved for a loan. A bigger-than-average down payment will show the lender that you are financially stable (even if you don’t have a job). More importantly, a larger deposit means you will take out a smaller loan, which is much easier to repay and manage.
Who is this option for: Car buyers who have saved up over the years, can tap into their savings and use the funds to cover the down payment of a new ride.
What are the downsides: The average price of a car in Canada is just over $45,000 while most buyers put down 11.7% of the value as a down payment. This means that you need to come up with at least $9,000 (or 20%) to produce a larger-than-average deposit. People out of a job for some time might have a hard time coming up with the cash, so this might not be the most suitable option for those who have no savings or have emptied their accounts to cover other expenses.
Keep a Low DTI
Your debt-to-income ratio (DTI) and credit score are the two metrics lenders use to assess your ability to pay off loans on time. Although the two are connected, borrowers usually place more emphasis on their credit score and forget that their DTI ratio is also important.
Put simply, your DTI is the percentage of monthly income that goes toward your debt payments. So, if you have a low DTI, you have more money available each month to pay your car loan, even with no job history.
Debt to income ratio is easy to calculate—just add up all your monthly debt payments and divide them by your gross monthly income. For example, if you have $500 in monthly debt and $1800 in monthly income, your DTI would be approximately 28%.
Who is this option for: Most lenders in Canada agree that anything lower than 46% is acceptable, although many would like to see a DTI ratio lower than 34%, says Credit Canada.
What are the downsides: Managing your debt is easier said than done and not everyone is in a position to improve their credit score or pay off their debt at once. However, if possible try to settle some smaller debts to give your DTI ratio a boost and then use it in combination with another option (such as having a cosigner) to get a better deal on your car loan.
Get a Car Loan at the Dealership
If you have bad credit or no income, you could apply for dealer financing. The dealership can either provide the money themselves or contact their network of lenders to get you approved.
Who is this option for: This is one of the best options to get a car loan with no job history since dealerships’ qualifying criteria are not as strict as that of traditional banks and credit unions. What’s more, with dealers there is the possibility of negotiating a better price or even trading in an older car for a new model and thus cutting down on costs. That said, car buyers with a good credit score (for instance who have lost their jobs in less than 30 days) would be better off applying for financing with a bank or online lender.
What are the downsides: You may get higher interest rates when you apply for auto financing at a dealership. What’s more, if you ever consider refinancing your car loan down the line, you are likely to get less favourable terms.
Before You Apply for a Car Loan: Get Pre Approved
The best way to get an idea of how much you can actually borrow is to get pre-approved for a car loan. When you get pre-approved the lender will give you all the loan info, from your interest rate to monthly instalments. You can then use the data to see which option works best for you and take it from there.
Yes, you can get a car loan without a job, but you’ll need to prove you have other sources of income. Alternatively, you could get someone to cosign a loan with you and act as your guarantor in case you default on payments.
If none of the options work for your situation, there are several lenders in Canada that can provide a no-income verification car loan, although they might charge higher rates than traditional banks and credit unions.
Yes, if you have the money you can pay for the car in cash and not apply for a car loan at all.
Yes, lenders will almost always ask you to verify your income before they approve you for a loan or that of your cosigner (if you have one). Even if they don’t, they will have strict criteria on who can qualify for a loan.
Yes, if you have a good credit score and a steady source of income (other than a salary), lenders might be willing to approve you for a loan, although the rates offered will not be as favourable as the ones provided to applicants with a regular income.