In 2021, Canadians registered 1.6 million new vehicles. But as much as everyone loves the thrill of a new car, there’s a basic reality that drivers can’t escape from:
Cars cost a lot of money to buy.
Between housing costs, student loans, and overall debts, getting approved for a car loan is difficult in the best of circumstances. Getting approved for car loans with bad credit can quickly become Mission Impossible.
If you need a car but you’ve got less-than-stellar credit, your search is over.
We’re going to talk about why bad credit has such a devastating effect on car loan applications. Then, we’ll talk about the causes of bad credit. After that, we’ll explain how borrowers with low credit scores can still secure excellent auto loans.
Sound good? Keep reading.
What You Should Know About Getting Car Loans With Bad Credit
For personal finance experts, the words “bad credit” and “auto loan” are not an ideal combination. But even so, the reasons for this commonly held position aren’t always clearly explained. Here are three important facts to be aware of as you work to secure your auto loan:
1. Car Prices Are Going Up
In June 2022, Yahoo reported that Canadian vehicle prices were reaching record-breaking highs. New vehicles sold for an average of $54,048. And before anyone could say, “No problem. I’ll just buy a pre-owned car.”, the average asking price for used vehicles shot up to $37,984.
For would-be buyers, these prices can only mean one thing:
You’ll need to ask for a larger loan to finance your car purchase.
And that’s not the only bit of tragic financial news. With more and more Canadians getting concerned about the rising cost of living, these increased prices may be here to stay.
2. Credit Gives Lenders a Snapshot of Your Financial Decision-Making
The phrase “Past behavior predicts future behavior” is a piece of advice that many lenders build their entire businesses around. And thanks to your credit score, potential creditors can get a sense of how you’ve managed your credit in the past.
Anyone can walk into a dealership and promise to repay their loans. But when you’ve got $30,000 or $50,000 on the line, lenders need more than promises.
For this reason, credit reports will often review factors like:
- How close you are to maxing out your credit
- How much credit you’ve applied for recently
- Debts that have been sent to collections
- Past bankruptcies
- Your credit card balance
For many auto loan lenders and dealerships, a low credit score can be a disqualifying factor.
3. Even If You Get Approved, Bad Credit Can Still Bite
As it turns out, bad credit doesn’t just impact your ability to get an auto loan approved — it can also affect your terms.
For instance, let’s say your application gets approved but you’re considered a weak borrower. To compensate for the elevated risk level you represent, lenders may offer you a lower borrowing amount or a higher interest rate.
At first glance, an extra percentage point or two might not seem like a big deal. But when you’re paying off a $54,000 car, even an extra 2% could cost you four figures.
What Causes Bad Credit?
If you’ve been struggling with your credit for a while, the circumstances that trigger credit score drops might seem a bit counterintuitive. But even so, there’s a common theme:
Lenders are looking for signs of responsible credit management. And they’re also looking for signs of financial distress. If you look at credit scores from this perspective, this next section will suddenly start to make a lot more sense.
On that note, here are some common causes of bad credit:
1. Missed or Late Payments
No matter which credit bureau you rely on, your payment history is far and away the most heavily weighted factor in your credit score. Why? Because auto loan providers, like most lenders, want to ensure that you’ll pay them back.
Imagine you’ve got two friends. Friend A is known for paying people back quickly. Meanwhile, Friend B is infamous for paying in drips and drabs before “forgetting” to pay the remaining balance. All things being equal, Friend A feels like a safer person to lend to, right?
On a professional level, lenders are doing a similar analysis.
After all, repayments are a big deal for auto loan providers. It’s the million-dollar question around your application. It’s the single issue that keeps loan officers up at night.
For this reason, missed payments and forgotten bills can hurt your credit score in a big way.
2. Using Too Much Credit
Although your payment history may be the biggest factor affecting your credit score, your credit utilization is the next most important issue for creditors.
When someone is on the verge of drowning, no one in their right mind would look at the situation and say, “This person needs more water!”. If you’ve maxed out your credit cards and your lines of credit, lenders are often reluctant to extend more credit. Never mind the five figures needed to make a car purchase.
People often say that the best way to improve your credit score is to pay down your debts. By lowering that outstanding credit balance to a 30% ratio, instead of an 89% one, you can let lenders know that you’re not overwhelmed.
3. Not Using Enough Credit
A lot of people look at the credit market and say, “No thank you. I’m going to avoid using credit cards altogether.”. On paper, this may seem like a sensible strategy. But in practice, you could be setting yourself up for more problems later on.
In sports, everyone knows the big names and superstars. When it comes to in-game production, people like LeBron James and Tom Brady are known quantities.
If you’re the head coach, you’re not going to bank the team’s success on a rookie who hasn’t played a single game. You’re going to go with the person who can deliver when the game is on the line.
We mentioned earlier that the average new vehicle costs over $50,000 to purchase. Short of a mortgage or a student loan, you’d be hard-pressed to justify making a bigger loan request.
Like an undrafted player or a rookie, people without a credit history are a risk to lenders. They don’t know if you’ll repay your debts promptly or if you’ll take the car and drive off into the sunset. In some ways, not using credit can be just as harmful as using credit too much.
4. Having Too Many Credit Inquiries
Sometimes this one can’t be helped.
Maybe you’ve recently moved to a new city and you had to rent an apartment. Maybe you bought new furniture and household items and needed additional credit to cover all of those expenses at once. When you applied for an auto loan the first time, you may have had a credit check done then too.
Even though each application may have been necessary, each check creates what’s known as a hard credit inquiry. And if this activity happened all at once, creditors may start to wonder why you’re looking for more credit on short notice.
When you’ve got your heart set on a specific vehicle make and model, you may feel like applying to every lender and auto dealer who will accept a meeting. But when every creditor is seeing a growing number of recent credit inquiries, you could be doing more harm than good to your credit score.
5. Mistakes in Your Credit Report
In 2022, CBC reported on a newlywed couple who had applied for a mortgage together. However, one partner’s lower credit score prevented them from getting approved.
This story made news because this reduced credit score wasn’t the result of a consumer proposal or a past bankruptcy — it was due to a name mixup. That’s right. The partner had bad credit due to a mistake on her credit report.
Not everyone has the luxury of making good money all of their lives. Periods of unemployment happen and old credit card debts can take time to pay off.
We get it.
But even so, you don’t want to take the fall for someone else’s mistakes. It’s often recommended that Canadians review their credit reports at regular intervals so that their credit scores are based on accurate information.
6. Negative Credit Information
If you’ve had a past bankruptcy or a bunch of missed payments, that can affect your credit score for years to come.
We spoke earlier about how lenders are sensitive to signs of potential financial difficulty. When there are signs of actual financial strain in your credit history, that puts up even more alarm bells.
Negative information can stay on your report for up to 6 years. However, as time goes on, those past negatives should start to affect your credit less.
How to Get Approved for a Car Loan With Bad Credit
We’ve talked about why having bad credit makes car loan applications difficult. And then we discussed why bad credit happens.
In a previous post, we covered the topic of getting an auto loan with bad credit. Here are some additional must-read tips:
1. Start Working on Your Credit Early
Even if you’ve had a few financial obstacles, you have more influence over your credit score than you might think.
Imagine your car is on the verge of giving out after a hard winter. After taking it to a mechanic, you realize that you’ll have to replace it within a year or so. You can give yourself a credit makeover so that when you’re ready to buy a car, you won’t need to look for bad credit auto loans.
And if the jump in your credit score doesn’t kick in until after you’ve taken out your car loan, you have the option of refinancing your car later on. If you don’t need to purchase a new car right at this moment, a dedicated credit-boosting campaign can do wonders.
2. Use Cash
How can people with bad credit purchase a car while saving on interest? They can pay in cash.
Let’s say you’ve got your eye on a $30,000 used vehicle. To drive off the lot with this vehicle, you’ll need to take out a sizable loan in the absence of a cash payment. And when you have bad credit, lenders are reluctant to part with that kind of money.
Cash lets you sidestep the credit process and head straight to vehicle ownership.
That being said, many Canadians don’t have $30,000 sitting untouched in their bank accounts. If that sounds like you, it’s still possible to avoid applying for a full-scale loan:
A sizable down payment can reduce the amount you need to borrow.
Even if you’re not buying the vehicle in cash, this can still help you secure financing. A lender who feels uncomfortable with loaning the entire $30,000 might be more open to lending $15,000 or $10,000 to a borrower who has bad credit.
3. Work With a Company That Offers No Credit or Bad Credit Auto Loans
Sometimes the problem isn’t necessarily with you or your present-day finances. It’s that your lender doesn’t know how to handle a bad credit car loan application.
Believe it or not, there are lenders out there who will emphasize factors like your income or your current debt-to-income ratio instead of your credit score. Our process, for instance, has this so down pat that our offers will factor in the type of car you’re looking to purchase.
When you need heart surgery, you don’t go to your local clinic. If you need to finance a car purchase and you don’t have strong credit, you may need to see a lender that specializes in bad credit car loans.
Get Your Bad Credit Auto Loan Today
Securing car loans with bad credit can leave you caught between a rock and a hard place. On the one hand, you need to finance your car purchase. But at the same time, the sky-high interest rates associated with bad credit car loans can put a serious dent in your budget.
As a company, we help Canadians like you get the best rates possible on their bad credit auto loans. If you want to save on interest while reducing your monthly payments, you need us. Apply and get approved for your next auto loan within minutes.