How Do You Qualify for a Loan - What You Need for a Credit Card, Loan or Mortgage in Canada

If you are thinking of applying for credit, there are twelve things you should know before you do. These tips will help you look at your situation from a creditor’s point of view and improve your odds of success—both with the person reviewing your credit application and in improving your overall financial situation.

1. What you need to qualify for a credit card, various types of loans, line of credit or a mortgage

Different types of credit have different requirements. The table below will give you a good idea of what is required for each type of credit.

2. Do you really need the loan, credit card or mortgage or is there another way?

It's important to ask yourself if you really need the loan, credit card or mortgage that you are thinking of applying for? Have you considered other alternatives? Have you spoken about alternatives with someone knowledgeable who you trust? If you are considering buying a brand new car, have you looked at saving thousands of dollars by buying a quality used car? If you buy a used car rather than a new one, you can take out a much smaller loan and become debt free much sooner.

If you are thinking about applying for another credit card, do you really need it, or would it be smarter to save for things before you buy them? If you are looking at buying a house, have you weighed the pros and cons of renting versus buying? Is buying a house the smartest choice for your situation?

3. How big of a credit limit or loan do you need? Do you really need that much or would it be wiser to apply for a smaller amount?

When many people decide they are going to buy something, they automatically think of something brand new rather than considering other alternatives. Many times a smart alternative can be buying a used car, an older home, a used appliance or a used bookshelf (from craigslist.com or kijiji.com) rather than buying something brand new. You should first look at your budget to see what you can truly afford and then evaluate how much cheaper something used is rather than something brand new. Many times it can make a lot more sense to save some money and buy something that is used. This can dramatically reduce the size of the loan that you need to purchase the item, and it can possibly save you a huge amount on interest payments. Brand new stuff is always nicer, but it isn’t always the smartest choice for everyone.

4. Do you have security for a loan?

When a lot of people look into how to qualify for a loan, this is the part they often overlook and fall short on. Most loans require some sort of security. A mortgage needs a house, condo or apartment, a home equity loan needs a property, a car loan needs a vehicle and a debt consolidation loan usually needs some sort of security too. If you are buying an older vehicle, check with your bank or credit union to see if they will lend you money on a vehicle that is the age you are considering. They usually only like to lend money for new vehicles. If you are looking at applying for a debt consolidation loan, consider what you have to offer as security for the loan. Do you have a lot of equity in a newer vehicle? Do you have another significant asset to use as security? No one but pawn shops and high interest finance companies will take household goods as security for a loan. If you don’t have security for a loan, you may need a co-signer.

5. Do you have a stable job?

You almost always need to have a constant source of income to apply for credit. If you don’t get a regular paycheque, how can a lender be sure that you will make your payments each month? If you do have a steady job, a lender may not be comfortable to extend credit to you until you have past your 3 month probationary period. In bad economic times, lenders can become even more cautious. The bottom line is don’t expect to get credit if you just landed a new job unless you have a stable employment record and this new job is clearly a step in the right direction for your career.

6. Do you earn enough income to make monthly loan payments?

When you apply for credit, your monthly debt payments should not exceed 40% of your monthly income. If you are applying for a mortgage, you must also make sure that your shelter payments (mortgage payment + heating and taxes for your new home) are less than 32% of your income. If your monthly payments exceed these levels, then you most likely won’t qualify for further credit.

7. Do you have decent credit?

To qualify for credit, your credit report and your credit score must be satisfactory to whichever lender you are applying for credit from. Most banks and credit unions have similar minimum credit scores that they look for. If you have always paid your bills on time, then you probably have nothing to worry about, but if you have had a history of slow payments, then you might have something to be concerned about. You can obtain a copy of your credit report and see what your credit looks like if you are concerned.

There are some companies that advertise that they help people with “less than perfect credit.” However, many of these companies also charge very high interest rates. If you choose to get a loan from a company that charges a high interest rate, make sure that you think about your decision carefully before going ahead with it. Figure out how long it will take you to pay off the loan and how much interest you will have to pay over the course of the loan. See if this makes sense for your situation. If you feel like you don’t have any other alternatives, take a look at our section that talks about re-establishing or fixing your credit.

8. Do you need a co-signer for your loan?

If you don’t qualify for a loan on your own or if you don’t have security for a loan, a bank or credit union may suggest that you need a co-signer for them to reconsider your application. You can see if you have a friend or relative who is willing to co-sign for you. However, you need to be aware that there are a number of dangers in having a co-signer for a loan.

9. If a lender or credit granter won't approve your credit application, make sure that you understand why so that you can work on your situation.

Many people who are declined for a loan don’t ask why or if they do ask, they don’t ask for clarification when the loan officer gives them an answer that they don’t understand. If you don’t fully understand why you don’t qualify for a loan, then how are you going to improve your situation? You won’t know what to work on.

Don’t feel rejected if a bank or credit union declines your loan application. They aren’t rejecting you; they are rejecting your current proposal (which is your application). If you change your proposal (your application) in some way, then it could become acceptable. Find out what you need to work on and then get to work. It may take some time, but if you know what to work on then you can move forward. Banks want to lend you money. If they won’t it is because you are too risky. Lower your apparent risk and they will be happy to work with you (we know this is easier said than done, and it can take years if your situation currently looks very risky).

10. Don’t apply at every bank in town.

If two banks or credit unions decline your application for similar reasons, then that is a pretty good indication that no one else wants to extend you credit either. Most banks and credit unions have similar lending criteria and they can see on your credit report that you have applied at other banks or credit unions recently. If a banker tells you that she can’t help you, find out why and then ask her what you can do to improve your situation. Try to follow your banker’s advice and also seek input from other knowledgeable people who you trust. If you are really struggling to get the credit you need to consolidate your debts, then it may be helpful to speak with a professional Credit Counsellor. They can help you explore all of your options and help you find the right solution. We have a list of free non-profit credit counselling agencies across Canada.

11. You do not have a right to credit.

Credit is a privilege that can be granted and revoked at any time based on a lenders judgment. Lenders are in the business of lending out money. If they won’t lend you money, then there is a really good reason. Don’t get upset with them. Work on your situation and/or look for alternatives.

12. Credit is not always the best solution.

In our society we tend to think that borrowing money is the way to fix our financial problems. This isn’t always true. Saving can be a much better idea at times. Check out our 10 Reasons Why You Should Save section to learn more about how this can help you.

Another misconception many people have is that credit must be a reasonable choice if a creditor offers it to them. Contrary to what many mistakenly think, this does not mean that you can afford it. Credit granters don't look at your budget before they offer you credit. That is your responsibility not theirs. If you don’t make a budget and then check to make sure that a loan payment will fit your budget, then you could put yourself into a difficult situation. If you can’t afford additional credit, than more credit probably isn’t the best solution for you. If you find yourself struggling with your debts, click here to find a professional you can speak with to find other options.