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 Are Bad Credit Car Loans?
Bad credit car loans involve borrowing money from a lender so you can finance a vehicle. It’s the same process as a traditional car loan, only you’re applying with bad credit. Having bad credit can make it more difficult to qualify for a car loan. It can also make it more expensive as lenders generally charge higher rates when dealing with bad credit borrowers.
What Is The Interest Rate On Bad Credit Auto Loans In Canada?
As of January 2024, the average interest rate for a regular car loan is 8.24%. Given that bad credit auto loans generally come with higher rates, you can expect a rate higher than this average. However, do note that legally lenders cannot charge borrowers an APR of more than 47%.
| January 2024 | 8.24% |
| December 2023 | 8.21% |
| November 2023 | 8.33% |
What Credit Score Do You Need To Get A Car Loan?
In Canada, credit scores range from 300 to 900. Credit scores below 659 are generally considered bad by lenders. 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.
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, you have multiple options, even with bad credit. Below are some of the best sources for bad credit car loans in Canada.
Best Bad Credit Auto Loan Lenders
| Amount | Interest | Term (Months) | ||
|---|---|---|---|---|
 | $500 - $50,000 | Up to 46.96% | 12 - 84 | Learn more |
 | Varies | 8.49% + | 24 - 96 | Learn more |
 | $500 - $35,000 | 29.99% - 46.96% | 9 - 60 | Learn more |
 | $500 - $10,000 | 12.99% - 39.99% | 9 - 36 | Learn more |
 | $5,000 - $40,000 | Varies | 12 - 72 | Learn more |
 | $5,000 - $45,000 | 4.90 % - 29.95% | 36 - 72 | Learn more |
 | Varies | 11.9% + | 12 - 84 | Learn more |
 | Up to $50,000 | Varies | 12 - 84 | Learn more |
Should You Get A Car Loan From A Dealership Or Private Lender?
Dealerships
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 you get a deal. However, some dealerships might look to take advantage of you because of your bad credit. It’s 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.
Private Lenders
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.
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 a loan option that works for your monthly budget.
Along with your loan payments, be sure to consider these other common car costs:
- Gas/electricity
- Repairs
- Maintenance
- Tires
- Car insurance
- Registration
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 isn’t 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. 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 do you want to make payments (bi-weekly, monthly, etc.)
Step #4 – Consider Your Options
Every lender and auto dealer has 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 flexible 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.
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 approve you for a large loan, most lending sources will want to confirm that you have a history of steady employment. 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.
Interest Rate
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.
Additional Fees
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 will not be what you’ll 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
How To Calculate Your Car Loan Costs?
Use this car loan calculator to calculate your car loan payments and the total cost of your loan.
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 will be 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. Before applying with a lender, be sure you meet the lender’s minimum income requirements.
Avoid These Bad Credit Auto Loan Traps
Unfortunately, having bad credit means that certain lenders and dealers may try to take advantage of you. They may assume you’re desperate enough to accept any deal. When looking for a bad credit car loan, watch out for these traps.
Loan Markups
The most common and probably most obvious of traps? Loan markups. Your dealer will 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.
84-Month Loan Terms
The longer your term the more affordable your monthly car payments will be. This can be very appealing to borrowers, this is why lenders offer 84-month terms. 84 months is seven years, which means you’ll be paying seven years worth of interest. The final cost of your car will be extremely high.
Yo-Yo Financing
This is when your dealer allows you to take home the vehicle you’ve chosen before you’ve been officially approved for a loan. Then they’ll call you back a few days later and explain 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 certain cons that can end up costing you such as high interest rates. 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.
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 financial situation and you should be able to get the car you want and need.
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
