Having bad credit can make it difficult to secure a car loan. However, there are options available for those who find themselves in this situation. This blog post will explore the world of bad credit car loans and provide tips and tricks for success.
If you are trying to navigate car loans with bad credit in Toronto, here are a few steps that may help to make an informed decision.
What is bad credit?
Bad credit refers to a person’s history of failing to pay bills on time, and the likelihood that they will fail to make timely payments in the future. It is often reflected in a low credit score.
A person with bad credit will find it difficult to borrow money, especially at competitive interest rates because they are considered riskier than other borrowers. This is true of all types of loans, including both secured and unsecured varieties, though there are options available for the latter.
Bad credit is often reflected as a low credit score, typically under 580 on a scale of 300 to 850.
Understanding Bad Credit Car: What You Need to Know
Car loan providers generally see any credit score below 660 as a bad credit score. In Canada, credit scores range from 300 to 900. By many auto financing standards, bad credit scores often encompass both “poor” credit (300-559) and “fair” credit (560-659) ranges.
Car loan lenders generally use your credit score to assess your eligibility of how well you handle debt. Your credit score indicates things like how much debt you’re carrying if you consistently make repayments and if you tend to max out your debts. A higher credit score means that you’ve consistently managed those factors well, which is a sign to lenders that you’re a responsible borrower. A lower credit score indicates to lenders that there’s a greater chance you may default on your auto loan.
Does Bad Credit affect Car loans?
Yes, it does. Do not be discouraged if you want to finance a car and have bad credit. While having a low credit score will limit your options, there are plenty of lenders who offer bad credit car loans if you have a steady source of income. You’ll likely encounter higher interest rates and fees for any loans you are approved for though.
Car dealerships and online lenders offer bad credit auto loans to consumers who are dealing with bankruptcy, have bad credit, or have no credit at all. With bankruptcy, the process of securing a car loan may take a bit more time because your lender may need additional information from your trustee. While a lot depends on your credit rating, other factors that may be considered are the type and cost of the car you are looking to buy and your financial situation. Typically, bad credit car loans are earmarked for people who have a steady source of income and meet at least one of the following criteria:
- Bad credit (anything under 659)
- Little to no credit history
- Filed for bankruptcy or insolvency
- Immigrant or newcomer to Canada
- A student with low income or little credit history
- Series of missed or late payments
Who offers bad credit car loans?
While your first stop for a car loan may be your local bank or credit union, those institutions tend to only offer car loans to good credit borrowers. Still, if you have a longstanding relationship with your bank, it may be worth discussing your options with a representative there first.
However, in general, you’ll have a much better chance of getting approved for bad credit car loans if you apply with auto lenders who specialize in that area, like at a dealership or with a private lender. Dealerships are often willing to provide bad credit car loans to their customers. You can improve your chances of getting approved if you apply with a co-signer that has a better credit score than you do. Like with any bad credit loan, you’ll likely pay higher rates.
Another option is also to get auto financing quotes from online lenders to give you some bargaining power at the dealership for a bad credit car loan alberta and help you feel confident that you’re getting a good deal. Some private lenders, typically online lenders, specialize in offering car loans to bad credit borrowers. Your chances of approval are much better with these types of lenders. Of course, you will still have to pay relatively high-interest rates.
What is the interest rate on bad credit car loans in Canada?
Bad credit car loan interest rates typically range between 9.90% and 29.99%. The interest rate you qualify for will be based on factors like your income, down payment, and credit score. Other factors that may impact your car finance interest rate are how much you need to borrow, the type of car you are buying, and how long you commit to repay the loan.
How to Improve Your Chances of Approval?
If you are worried your credit score might hinder your prospects, here are a few things you can do to help improve your chances of approval for car financing with bad credit.
- Improve your credit score- If you can wait at least 6 months to buy a car, try to get your credit into better shape. Pay down your credit card debt as much as you can and make sure you aren’t late or missing any payments on any of your debts. This will help improve your credit score and show lenders that you can handle your current debt better.
- Check your credit report- A mistake on your credit report can cost you points on your credit score. So it’s worth checking your credit report before applying for a bad credit car loan to ensure all the details are in order. You can get a copy of your credit report for free and fix mistakes by contacting the creditor.
- Set your budget- Come up with a limit to how much you’re willing to spend on a car, how much you can afford for the down payment, and how much you can pay each month. Take into account other car costs like registration, gas, insurance, and maintenance when deciding your budget. Bad credit financing lenders may offer you more but if you’ve already done your homework, you’ll know precisely how much you can realistically afford.
- Shop around- Apply for pre-approval with a few bad credit auto loan lenders to see what rates and terms you are eligible to qualify with. If they run a hard credit check, make sure to keep your applications within a few weeks to avoid hurting your credit score too much. Compare bad credit car loans features like APRs and fees.
- Apply with a co-signer -Bringing on someone with a higher credit score or a higher income can increase your chances of approval for car financing if you have bad credit. If you plan on sharing the car, you will also share the responsibility for paying it off.
- Down payment-A down payment can make a difference with respect to how much you need to borrow, drive your interest rate down, and can increase your chances of approval. A good rule of thumb is to set aside 10% to 20% of a car’s purchase price as a down payment. Consider your savings and monthly income and see how much you can feasibly set aside for a down payment.
What to watch out for with bad credit car loans?
On the flip side, a bad credit auto loan comes with its fair share of red flags to keep an eye on. Make sure you know exactly what you’re getting into before you sign up to finance a car with bad credit. If you don’t do your research, you could find yourself in a financial nightmare or, worse, a scam. Here are some red flags to be aware of:
- Watch your budget. Work out how much money you’ll be paying back over the course of the loan to get an idea of how much you’ll be spending overall on your vehicle – is the amount plus interest worth it? More importantly, can you afford it?
- Steep interest rates for bad credit. You may be able to secure auto financing despite having bad credit or no credit at all, but you could end up paying interest rates as high as 29.95% in Toronto or more for your loan.
- Hidden fees and penalties. After you’ve done your research on your lender, triple-check your loan’s terms and conditions to make sure you’re on board with all the details in the fine print. You may be committing to paying for origination fees, late payment penalties, extra payment fees, or other charges.
- Extremely long loan terms. Some lenders offer bad credit car loan terms of over 7 years that can accrue major interest over time. Sure, the monthly payments will be lower, but if it’s not absolutely necessary, you should avoid longer terms to save money.
- Being unprepared. Check your credit score before you do any car shopping to avoid applying for loans you’re unlikely to get approval for. Each application requires a hard pull on your credit, which can hurt your credit score. Once you know what interest rates you can qualify for with your credit score, you can better compare your options.
- Falling for a scam. There are some common scams and tactics you should be aware of when you’re shopping for a bad credit car loan. There are scams like yo-yo financing, guaranteed approval, and other common schemes. Don’t let a predatory lender push you into making the wrong financial move.
While bad credit can be a barrier to securing a car loan, it doesn’t have to be an insurmountable obstacle. By understanding the options available, taking steps to improve your chances of approval, weighing the pros and cons, and avoiding predatory lenders, you can successfully navigate the world of bad credit car loans.