You’re trying to buy a new car and you know that a bank or credit union will probably turn you down. It’s not your fault—you’ve had some bad luck recently, and now you’re looking at paying an astronomical interest rate on your loan until you pay it off in full.
If you’re in this position, you’re not alone—nearly 21% of all Canadians have poor credit. That doesn’t mean you’re doomed to a life of public transportation, however. You can still get a loan to finance your car purchase and get back on the road.
Here are five things you should know about getting a bad credit auto loan.
1. Work on Your Credit Before Going Car Shopping
Check your credit report well in advance, even if it’s months before the purchase date. You can clean up your credit score by paying off past-due accounts, disputing credit report errors, and adding positive information to your report before a car dealer checks it.
2. Avoid Additional Bad Credit Items
In the months leading up to your loan application, keep your finances in order. Pay all of your bills on time and don’t open new credit accounts or take on large amounts of debt. Auto lenders will take this into account.
Late rent payments, repossessions, debt collections, and bankruptcy are all red flags for auto lenders.
3. The Bigger the Down Payment, the Better
If you have a bad credit score, making a large down payment on a car can boost your chances of securing it.
If you have saved up some money for a down payment, it can offset higher interest rates on bad credit loans. Down payments also help lower your monthly loan payments, making it easier for you to stay on top of them. If you can manage a down payment of 20% or more, this will improve your chances of securing a bad credit loan.
4. Don’t Buy Intending to Trade
Trading in a car is an attractive choice, but when you’re dealing with bad credit auto loans, that’s not always the best option. Instead of trading in your car before making all the payments on it, try to keep it until you pay the loan off and use any extra money each month to save for your next vehicle purchase.
When you trade-in for a new vehicle, the balance of the old loan is added to the new one, so your payments increase or the repayment period gets longer. Don’t trade unless you improve your credit score, which will qualify you for a lower interest rate.
5. Skip the Extras
When you’re buying car loans with bad credit, your loan officer may be less likely to approve an outrageous amount. That means that some features you want might not be available. You can save money by leaving off the leather seats and entertainment system. If you add features that aren’t necessary, your loan payment will be even higher.
Getting Approved for a Car Loan
Many lenders offer a prequalification tool on their websites, which allows you to estimate your eligibility for an auto loan. If you can’t get preapproval or are financing at the dealership, read over all the terms of your loan agreement before signing.
Remember that in some situations, walking away from an agreement may be the best choice—even if you really need a car. You should be able to find another car loan, even if your credit is bad. It’s more important that you feel comfortable with the terms of any loan.
Bring a Co-signer
If you need financing but feel like your credit score is keeping you from qualifying, try finding a cosigner with good credit. A cosigner doesn’t have to be related to you; they just have to agree to sign the loan agreement and promise to make payments if you can’t.
Assess Your Income and Debt
Even if your credit score is low, a lender will look at your monthly income against existing debt obligations to assess whether you can afford new loan payments. If your income is high enough to cover the new loan while still allowing you to meet your other financial obligations, you might qualify.
Before you apply for a loan or go car shopping, total your monthly debt so that you can figure out how much of your monthly income will be available to pay off loans.
Getting Denied for a Car Loan
If they deny your loan, ask the lender to tell you why. Here are some likely reasons:
Mistakes on the Application
If you make a careless mistake on your application, the lender can deny you credit without even considering other information that could improve your chances. The good news is that you can resubmit an application if the mistake was your fault. If it was not, be prepared to provide documentation.
Limited Credit History
Having a bad credit score after missing a few loan payments is one thing, but having no credit history at all is another. The latter case can be more challenging for lenders because they have no way of knowing how likely you are to pay back a loan. Therefore, if you don’t have a credit history, it might be difficult to get a loan.
Your best bet may be to apply for an unsecured loan from a bank or credit union.
Too Much Debt
If your DTI ratio is 50 percent or higher, expect that they will probably turn you down for the loan. Some lenders may work with you, but they will probably charge a higher interest rate.
Find Your Ideal Bad Credit Auto Loan in Canada
Regardless of your credit history, there’s an auto loan in Canada that’s right for you.
At CarsFast, we’ve got a simple, secure online process that can help you find the best bad credit auto loan for your needs. We work with an enormous network of dealerships and lenders to get you great rates on auto loans, regardless of your credit history. Just fill out our easy application form to get started.