Many of us know that the first thing anyone mentions when talking about any kind of loan is: what’s your credit history like?
This vital number is ubiquitous around the world and is the key deciding factor in many financial institutions’ lending process.
But what if you don’t have one?
This is a scenario many new Canadians will find themselves in, and can be a real issue when looking to secure their first car loan.
Here, we walk you through everything you need to know about no credit car loans, from what they are to how you can get one.
What Is A Credit File?
Before we get into how a no credit car loan works, we need to understand what a credit file actually is.
A credit file (or credit history) is a record of all the loans or “credit relationships” you have ever had with any financial institution or credit provider.
Things that will appear on your credit file will include credit cards you might have or have had in the past, personal loans you took out, utility providers such as internet and cell phone plans, or mortgages.
Any time you make an inquiry to a credit provider, for example to apply for a new credit card or loan, an entry will appear on your credit file.
Similarly, if you have ever made a late payment on a credit card, defaulted on a loan, or declared bankruptcy, these will all appear on your file too.
A credit file is essentially a way for a potential credit provider to gauge how much of a risk there is of you not being able to pay back your loan and whether the money the lender would make on approving your loan is worth that risk.
Your entire credit file is often summarised in a real number, known as a credit score. Many things can impact your credit score, but ideally the higher the number the better your chances of being approved for a loan.
How Do You Get A Credit File?
A credit file isn’t something you need to set up or actively create. It is typically generated passively as a side effect of your everyday life and the associated credit relationships.
Pretty much everyone needs to have a cell phone these days, which means they need a cell phone provider. That’s a credit relationship.
89% of all Canadians have at least one credit card, issued by a bank or other financial institution. That’s another credit relationship.
All of these everyday credit relationships will start accumulating on your credit file, usually once you turn the age of majority in your province and can start opening these accounts independently of your parents.
Your credit file will definitely play a role in whether you are approved for a car loan or not.
But what about newcomers to Canada that haven’t spent enough time in the country to build up this credit file?
No Credit Car Loans
Designed for recent arrivals to Canada, or for young adult Canadians who do not yet have an established credit file, no credit car loans are exactly that – car loans that do not depend on the applicant having a credit score at all.
Having no credit means that the lender will need to use a different set of criteria to determine whether they are willing to accept the risk of taking the applicant on as a customer.
Typically, no credit car loans will involve some combination of the below criteria to compensate for not having an established credit history:
Large Down Payment
To counterbalance the heightened risk a lender will be taking on by approving a no credit car loan, many financial institutions require a much larger down payment than of a typical loan.
These can range in size, but on average can sit around 25% of the loan amount. This can be a huge impact for recently arrived immigrants – a 25% down payment on a standard $40,000 family car would be a whopping $10,000 straight off the bat.
This can price a lot of newcomers out of the car loan market, as many immigrants are only left with less than $20,000 after all other settling expenses have been taken into account.
However, if you can afford the down payment, or are willing to lower your car bracket in order to afford it, putting down a large sum at the beginning of the loan can save you thousands down the road in interest costs.
For example, say you put down that $10,000 down payment on a new $40,000 car with an interest rate of 6.00% over 48 months. That means your loan amount is $30,000 and your monthly repayments will be $704.55. At the end of your loan you will have paid the lender $3,818.44 in interest.
However, if you had only put down $5,000 to begin with (a 12.5% down payment), your loan amount would be $35,000 and your monthly repayments would be $821.98. When the loan ended in 48 months, you would have parted with $4,454.85 – almost an extra $650!
Whilst that might not seem like a huge amount, for a new Canadian still establishing themselves, every dollar counts.
Even if you don’t have a long employment history in Canada, no credit car loan applications will most likely still ask you for an employment history over the past several years.
This is to show the lender that you have a track record of making an income and could be used to reasonably determine that you will continue to make an income in Canada and thus be able to afford to pay your loan.
Many credit lenders will also require that you have a job in Canada before they will consider your application, even if you haven’t been on the job for very long.
A letter of employment and your past several pay slips will usually be enough to meet your lenders criteria for your no credit car loan.
A no credit car loan is considered a secured loan as the car is a physical object with real world monetary value that is used as collateral.
What this means is that, should you miss a payment on your loan or be unable to make a scheduled repayment for whatever reason, the credit provider has the right to repossess the vehicle and sell it to recoup their losses on the loan.
This can be a double edged sword: as the loan is secured it is often approved more readily than an unsecured loan (where there is no physical, valuable object involved in the loan) as the credit lender has a comparatively lower risk.
Secured loans can also offer lower interest rates, and are a great way to build up your credit file if you go through reputable credit providers.
However, it also means that the credit provider has a clear and actionable process by which to take the car back off the applicant should a payment be missed.
Unlike in an unsecured loan where money is the only asset involved in the transaction and the credit provider needs to rely on debt collection, a secured car loan dispute can be resolved by simply repossessing the car and selling it.
Whilst this is nothing to be concerned about if you are clear about your finances and know what you can afford to repay every month, it is something to think about when it comes to applying for a no credit car loan.
How Do I Get A No Credit Car Loan?
The process to get a no credit car loan is actually fairly straight forward once you understand what is required and who to ask.
Whilst the specifics will likely vary between credit providers in terms of what their specific lending criteria involve, the general process is outlined below:
1. Make An Application
This is the obvious first step in taking out a no credit car loan. This can involve heading into a bank or credit union branch and speaking with someone in person who will tell you want you need to provide to get the process started.
A faster and more convenient way to apply is online with an online car loan broker, such as AutoLoans.ca. With years of experience and strong relationships with dozens of different credit providers in Canada, we don’t rest until we find you the best rate and terms possible on your no credit car loan.
Applying online is as simple as filling out our online application and speaking with one of our dedicated team members who will guide you through the entire process from the comfort of your own home.
2. Pick Your Car
Once you have been approved for your no credit car loan, it’s time to pick out your car!
This step usually involves heading to a dealership and browsing their selection of cars that suit your needs.
This is the time to start negotiating a price for your new car, as it can save you thousands off the sticker price if you are a savvy negotiator, and any reduction in the price of the car will translate to less money you need to borrow for your credit provider.
Unlike many traditional car dealerships and credit providers, AutoLoans.ca offers over 5,000 world class vehicles directly to car loan applicants.
Our strict reconditioning process ensures only the best cars make it to our valued customers and with so many cars in our fleet, you are guaranteed to find something that suits your needs.
If you spend a few weeks in your new car and realise it’s not the absolute best fit it could be, we offer a 30 day exchange program where you can select another one of our cars and swap it out easily and quickly. No more buyers remorse!
3. Get On The Road!
You’ve got your no credit car loan and your new car, so get out there and enjoy your new freedom!
One of the fantastic benefits to getting out a no credit car loan, besides having a new set of wheels, is that should you make all your repayments on time without any issues, the car loan will help you build up an established credit file in Canada.
Coupled with any credit cards you might take out and any utilities you have in your name, this can quickly provide you with a great credit score.
A good credit score will be essential when it comes time to refinance your car loan and can be used as significant leverage with your credit provider to offer a better interest rate or terms of the loan.
That way you can go from a no credit car loan to a good credit car loan and make even more savings!
For more information on your car loan options without a credit file in Canada, simply head to our homepage and speak with one of our team members today.