Underwriting: what does it mean in Canadian car loans?

In Canadian car loans, underwriting is the comprehensive and critical process where a lender meticulously assesses a borrower's creditworthiness and the associated risk before approving financing. This involves a deep dive into several key factors: the applicant's credit history and score, typically sourced from Canadian bureaus like Equifax and TransUnion, their income stability and employment verification, existing debt-to-income ratio, and the proposed down payment. Lenders also evaluate the vehicle's value and condition, ensuring the loan-to-value ratio aligns with their risk parameters.

For borrowers, understanding this process is paramount because it directly dictates the interest rate offered, the loan term, and ultimately, the likelihood of approval. In the Canadian market heading into 2025, economic conditions and higher borrowing costs mean lenders are often more stringent, scrutinizing applications more closely, which can lead to stricter criteria or higher rates for perceived higher-risk applicants. Furthermore, the total cost of the loan, including provincial sales taxes (PST/HST) which are often financed into the principal, is factored into the underwriting calculation, impacting affordability and risk assessment. Canadian consumer protection legislation, varying by province, mandates clear disclosure of all loan terms, fees, and the total cost of borrowing, ensuring transparency and empowering consumers to make informed financial decisions about their vehicle purchase.