Living with bad credit can be a challenge, especially when you’re trying to get approved for financing products like a car loan. Most consumers believe that they need to have an excellent credit score to get an auto loan, when in fact there are lots of auto loans available for those with lower credit scores. Looking for and being approved for an auto loan when you have a low credit score can be a bit difficult but not impossible so don’t be discouraged from even trying.
Here are a few things you need to know if you’re looking for an auto loan and have a low credit score.
What Is A Bad Credit Car Loan?
A bad credit car loan involves borrowing money from a lender so you can finance a vehicle. It’s basically the same process as a traditional car loan, only you’re applying with bad credit, which can make the process slightly more difficult. In this case, the lender would approve you for an auto loan despite your low credit score.
Do You Have Bad Credit?
In Canada, credit scores go from 300 to 900. Bad credit is when you have a score within the 300 to 600 range while a good credit score is in the range of 700 to 900. This low score can be the result of many factors, including but not limited to:
- Too many late, short or missed credit account payments
- A mistake on your credit report, like the wrong address or name
- Applying for too much new credit within a short period
- Carrying large amounts of unpaid debt for months at a time
- Being a victim of fraud or identity theft
- Going through a debt settlement, consumer proposal, or bankruptcy
Unfortunately, banks, credit unions, and other types of lenders will sometimes deny applicants with bad credit scores because they have a higher chance of defaulting on their loans. But that doesn’t mean that it’s impossible to get a car loan when you have bad credit.
How To Apply For A Car Loan With Bad Credit
If you find a trustworthy and affordable alternative lender or auto dealer, here are some simple steps you can take to get approved for a bad credit car loan:
Step #1 – Set Your Budget
Car loans can vary greatly in price depending on where you apply, what kind of vehicle you’re financing and how strong your financial health is, including your credit score. So, the first thing you should do is find an option that works for your income, savings and monthly budget.
Along with your loan payments, be sure to consider these other common car costs:
Step #2 – Decide If You Want A New Or Used Vehicle
The type of vehicle you’re financing can also make a huge difference in price, as well as your ability to qualify for a bad credit car loan with appealing conditions. For example:
- If you agree to finance a newer car, your lender/dealer may offer you a better payment plan and interest rate. Plus, the car will likely be more safe and reliable than an older model with higher mileage.
- However, a used car can be more affordable. Not only would this help you pay less interest over time, but value depreciation also isn’t as much of a problem with older cars.
Step #3 – Get A Car Loan Quote
For a better idea of how expensive your bad credit car loan could be, shop around with different lenders, dealers, and retailers in your area. If you’re willing to provide a few basic pieces of information, many of these financing sources have a free pre-approval process that lets you know what your potential loan payments will look like.
Keep in mind that this quote may not end up being the true price of the actual bad credit car loan you’re approved for. Normally, it’s just a semi-accurate estimate. During the pre-approval process, the details you’ll have to provide may include:
- The make, model and year of the car
- Your gross monthly/yearly income
- The length of your desired payment plan
- How often you want to make payments (bi-weekly, monthly, etc.)
Step #4 – Consider Your Options
Every lender and auto dealer offers different requirements, rates and payment plans for their bad credit car loans, so it’s important to compare multiple offers. Above all, make sure that your financing source is as flexible as possible and has a good reputation.
When you find an appealing bad credit car loan, you should also read your contract carefully and make copies for your records. Remember, a car is a serious financial investment.
Where Can You Get A Bad Credit Car Loan In Canada?
The good news is that when it comes to finding the right car loan, regardless of whether or not you have bad credit, you have multiple options. Below are some of the best sources for bad credit car loans in Canada.
Most of the time, banks may not be able to give you a loan if you have bad credit, but it is worth a try. Try reaching out to the banks and credit unions in your area. Plead your case as to why they should approve your request for a car loan. While the results might not be fruitful, at least you’ll be exercising all your options.
One of the most common places for people with bad credit to look for car loans is the car dealership itself. Dealerships are often willing to work with everyone and there is a good chance they can help get a deal done. However, some dealerships might look to take advantage of you because of your bad credit, so it is important to be mindful of the deal they are giving you and if you can, shop around to make sure you aren’t being ripped off.
If the dealership isn’t willing to work with you or won’t give you an interest rate or deal that you feel is fair, it might be a good idea to go the private lending route. There are hundreds of options for private loans out there, but of course, these can often be riskier than getting a loan from an established company, website, or dealership. It is important to do extensive research on the lender if you decide to get a car loan from them.
So, now that you know some of the options available to you when you have bad credit and need a car loan, let’s look at some tips to help you get the best deal possible and make the process as easy as you can.
Considering purchasing a used rental car? Read this first.
Documents Needed To Get A Bad Credit Car Loan
Although bad-credit-friendly lenders and auto dealers have easier restrictions, you will need several personal and financial documents to apply, including:
- Proof Of Employment – Before they’ll approve you for a large loan, most lending sources will want to confirm that you have a history of steady employment, so copies of your latest pay stubs or paychecks may be necessary.
- Proof Of Income, Assets, And Liabilities – The lender/dealer also needs to know how much car you can afford. So, they may ask for your latest bank statements, as well as any paperwork that details your existing debts and properties.
- Driver’s License & Proof Of Address – When applying, you’ll have to show that you’re a registered driver in your province or territory. To confirm your residency status, a bill displaying your address may be required too (utility, internet, etc.).
Everything you need to know about refinancing a car loan.
Bad Credit Car Loan Costs To Consider
Before you finance any sort of vehicle with a bad credit car loan, it’s essential to find a payment plan that fits your budget. Here are some of the largest costs to factor in:
Length Of Car Loan Term
A Longer loan term involves lower monthly payments, which can be appealing. That said, a longer term means more interest paid over time. Sometimes a shorter loan term is the best option to save you money and pay off your loan faster.
Bad credit car loans can have high rates. So, the best way to get your rate reduced is to apply with a solid income, a down payment and/or a cosigner. Financing a cheaper vehicle can allow you to pay less principal and interest too.
Bad credit car loans can come with many high service and administrative fees as well. This is especially true if you finance your car through a dealership, where fees like vehicle preparation and documentation may also apply.
Total Cost vs. Monthly Payment
The sales price of your car may not be what you’ll actually pay if you finance it. When you factor in fees and interest, all your monthly loan payments could add up to much more than that overall.
Bad Credit Car Loan Tips
Here are some other ways to get approved for an affordable bad credit car loan:
Make A Down Payment
Saving up for a down payment before you purchase a new or used car is always good practice. It could even help increase your chances of getting approved. Although, there are no down payment car loan options offered by certain lenders.
Get A Cosigner
Asking someone to cosign your car loan is another way to get approved for better conditions if you have bad credit or no down payment. This person will need to have fair to good credit and are responsible for making your payments if you do not.
Do A Trade-In
If your current car has resale value, an auto dealer may allow you to trade it in for a lower price on the car you’re financing. However, you may not get what the car is truly worth because the dealer needs to make a profit.
Meet The Lender’s Minimum Requirements
Since you have bad credit, the right dealer/lender will focus on other aspects, like your income. Here are the minimum income requirements for most alternative lenders and dealers:
|Income Type||Minimum Income Before Taxes & Deductions|
|Monthly||$1,800 a month|
|Bi-Monthly||$900 twice a month|
|Bi-Weekly||$845 every two weeks|
|Weekly||$420 a week|
|Hourly||$10.50 per 40-hour workweek (or equivalent)|
Avoid These Bad Credit Auto Loan Traps
Unfortunately, having bad credit means that certain lenders and dealers may try to take advantage of you because they think you’re desperate enough to accept any deal. When looking for a bad credit car loan, watch out for these traps.
The most common and probably most obvious of traps, loan markups. Your dealer will definitely profit from trying to get you to go for a more expensive loan, stick to your plan and don’t accept any offer that you can’t afford.
This is when your dealer allows you to take home the vehicle you’ve chosen before you’ve been officially approved for a loan and then calls you back a few days later and explains that your loan application has been rejected. They’ve now trapped you in with a new price and a new interest rate knowing that you’ll most likely pay whatever they ask you to.
“Buy Here, Pay Here”
These types of dealers will offer you a loan no matter what your credit history or score is. While this might seem like exactly what you need, there are some cons that can end up costing you. Not all “buy here, pay here” dealerships are bad but you should do your research and know what kind of interest rate you can qualify for ahead of time as they might try and scam you with an incredibly high one.
Bad Credit Car Loans FAQs
Do bad credit car loans help build credit?
How can I improve my chances of getting a car loan with bad credit?
- Make a large down payment
- Find a cosigner
- Offer collateral to make the loan secured
- Apply when you have a good income and multiple years at the same job
- Pay off existing debts
- Be discharged from debt settlements, consumer proposals or bankruptcies
Will I have to make a down payment to get a car loan if I have bad credit?
Getting The Right Bad Credit Car Loan
Car loans are not reserved for those who have high credit scores. Your low credit score shouldn’t discourage you from looking for a new car and a loan to pay for it. Make sure you follow our steps and keep yourself informed about your own financial situation and you should be able to get the car you want and need.
|Add-Ons||Any features or services that are applied on top of the base price of a car are considered add-ons. These can include things such as tinted windows, heated seats, leather seats, alarms, and wheel locks, to name a few.|
|Base Price||The base price of a car is the cost of the vehicle without any upgrades or added features that can be added after the car is ordered from a dealership. Only standard equipment and the manufacturer’s warranty are included in the base price, but any other fees will be added afterward.|
|Certified Pre-Owned (CPO)||CPO cars refer to used cars that have been certified, either by the dealership selling the car or the manufacturer of the vehicle. This gives consumers confidence knowing they are buying a used vehicle that is in good condition. When a used car is obtained by a dealership, it is inspected by a certified mechanic. The car is then repaired if it meets the required standards and is then ready to be sold as a CPO vehicle.|
|Clear Title||A clear title means that the owner of the car has a free and clear title and no longer carries a balance owing on a car loan. There are no liens of the title or levies from creditors.|
|Dealership||Auto dealerships are businesses that are authorized to sell new or used automobiles to consumers and serve as a direct dealer for automakers|
|Dealership Financing||Consumers can obtain dealer financing to help fund the purchase of a vehicle. A contract is signed with a dealership that requires a consumer to pay for a specific amount plus interest and funding fees over a certain period of time. Dealers will send the details of the consumer’s financials to various lenders to find one that will approve the loan.|
|Depreciation||Depreciation refers to the decline in the value of a vehicle. Immediately after purchase, a vehicle will become less valuable as soon as it is used. Put another way, depreciation is the rate at which an automobile loses its value over time|
|Extended Warranty||Vehicles come with a manufacturer’s warranty when purchased, but buyers can choose to purchase an extended warranty. This serves as a form of insurance policy on the vehicle to cover the cost of potential repairs in the future. An extended warranty is usually good for a certain period of time and/or mileage.|
|Lease||A contract that allows an individual the right to use or occupy a property for a specified period of time in exchange for a monthly payment. Leases are common for a property like apartments and vehicles. The individual on the lease does not own the asset at the end of the lease’s term, it is strictly for rental purposes.|
|MSRP (Manufacturer’s Suggested Retail Price)||Car manufacturers will offer recommendations on how much a car should be priced at the retail level, known as the manufacturer’s suggested retail price, or MSRP. The purpose of the MSRP is to standardize pricing in the automobile industry so that there is not a lot of fluctuation in price from one dealership to another.|
|Title Loan||A title loan uses the vehicle title as a form of collateral to secure a loan. Borrowers must own their vehicles free and clear and no longer owe any amount on a car loan. A lender will place a lien on the car title in exchange for funds. If the borrower defaults on the loan, the lender can take possession of the vehicle and sell it to cover any losses.|
|Trade-in Allowance||A trade-in allowance is the amount that a car dealer will reduce the cost of a new car purchase by after the consumer’s old vehicle has been traded in. It is somewhat like being given credit from the sale of an existing vehicle that is then applied to the purchase of a new vehicle.|
|Trade-in Value||A trade-in value is the amount that dealerships offer consumers for their vehicle and is typically applied toward the purchase price of another vehicle. Dealerships will assess the value of the vehicle and will base the amount that can be applied to a new car purchase. The consumer will then trade in the old vehicle and the assessed value amount will be deducted from the price of another vehicle. Trade-in value is often different than what the vehicle may be worth when sold in the open market.|
|Vehicle Identification Number (VIN)||Every vehicle will have its own unique vehicle identification number, which is used to identify a specific vehicle. No two vehicles will have the same VIN, making them easily identifiable with this unique 17-character code.|