Did you know that the average credit score in Canada is 676? Usually, auto loan financing requires you to have a relatively good credit score. However, there is still a chance to do this even if your credit score is bad, although it will be a bit more of a challenge.
If you are wondering how to finance a car with a bad credit score, don’t worry. Even though it will be harder than usual, there are still ways in which you can obtain car loan approval. But how?
Keep reading and learn more about how to finance a car despite a low credit score.
Understand Your Credit Score
A lot of people know that their credit scores are bad but they might not really understand what that means. The first thing you should know is that a truly bad credit score is between 300 and 559. 300 is the lowest score you can possibly get and with this score, you will find it very difficult to accomplish any kind of financial duties.
Your credit score is important because it reflects how responsible you are with your money. For example, if you never pay your loans and bills on time, this will lower your credit score quite a lot. This will show that you are not reliable when it comes to paying off mortgages, loans, or other bills on time.
This will make you an unattractive candidate to most loan lenders and banks. While most people don’t have an exact score of 300, many people have scores between 300 and 559. The next range above this one is 560 to 659.
This range is a bit better to be in and it is known as the “fair” range. Even so, this is still not a great range to be in. To have this kind of score, you would still not be very financially responsible and this would reflect in the score.
The Details
But even if you do have this kind of score, you can still get a car loan from certain lenders. It is important to understand your credit score so you can understand your chances. You likely won’t be able to get loans from banks and other traditional lenders.
Instead, you’ll have to seek out lenders that specifically cater to people with low credit scores. These loans usually have higher interest rates than usual. These higher interest rates are meant to spur the person to pay their debt on time.
Besides that, with a low credit score, you might not be able to get a very large loan even if you go to a low-credit lender. Even so, a small loan is better than no loan at all. Even if your credit score is bad, you might want to consider raising it slightly before applying for a car loan.
Even some low-credit lenders have credit score limits and if you are below that limit, you won’t even be able to apply. But how should you get started with the application in the first place?
Consider Car Loan Pre-approval
If you want to finance a car, you might want to consider applying for loan pre-approval before you actually apply for the loan itself. This is important for a variety of reasons. Once you apply for a car loan, the application is likely to affect your credit score in a negative way.
This is known as a hard inquiry. Once you apply for a car loan, your credit score will go down a few points. This is usually not a problem for people with higher credit scores, but if you already have a bad credit score, this could make your score quite a lot worse.
Besides that, once you apply for a loan, there is no chance that you will be approved for that loan. If you are rejected, your credit score will still take a negative hit. More than that, you won’t be able to apply for that loan again for quite a few months.
This, of course, is not an ideal scenario and fortunately, there is a way to smooth out these problems. In particular, you should consider loan pre-approval before applying for a real loan. This is because applying for loan pre-approval will not negatively affect your credit score in the way a real application can.
Applying for pre-approval is usually simpler than applying for a real loan. The application itself won’t contain as much information and you should be able to fill the whole thing out quite quickly. Once you send in the pre-approval application, you will have to wait for a certain period of time before you can see whether or not you are pre-approved.
What You Need to Know
For some, they might get an answer within an hour while others might need to wait a few days or even an entire week. Whatever the case, if you are pre-approved, this is a good sign. Getting pre-approved means that you have a good chance of getting a real car loan with the lender you are working with.
If you get rejected, on the other hand, you should wait to apply for a real car loan. This is because it will be very unlikely that you will get approved for a real loan if you have already gotten rejected for pre-approval. But keep in mind that even if you are pre-approved for a car loan you are still not guaranteed to get a real loan.
Instead, pre-approval means that you have a good chance of getting approved for a real loan, but the chances are still not 100%. Of course, a good chance is better than not having any chance at all. Fortunately, even if you get rejected for pre-approval, the response should have a reason as to why you were rejected.
That way, you can work on whatever factors kept you from getting pre-approved. Usually, this has to do not only with your credit score but with other big factors that affect your credit such as if you filed for bankruptcy recently.
Find the Right Lender for You
Finding the right loan lender is very important if you’re looking to get a car loan with bad credit. The first thing that you need to know is that your options will be more limited if you have bad credit. Most regular lenders like big banks won’t accept you because people with bad credit scores may or may not pay their loans back on time and banks don’t want to deal with that.
Instead, you will have to do a bit of research online to find the right loan lender for you. Fortunately, this process isn’t too hard, but there are certain things you will need to consider. This is because even with bad credit loans, some lenders are much better than others.
For example, some lenders may agree to give you a loan, but that loan may have ridiculously high-interest rates. While most low-credit loans have higher interest rates than usual, you should avoid those that are much higher. With loans like these, you could end up paying hundreds or even thousands of dollars in interest alone.
In that case, you can imagine that it would be very difficult to pay off the loan itself when the interest rates are taking up all your money. For that reason, you should try to choose a lender that offers loans with relatively moderate interest rates. Even if you are desperate for a car loan, you should try to refrain from getting loans with very high interest rates as you are likely to regret them later.
Consider Your Options
When searching for the right lender, you should also make sure that the lender is reputable and experienced. If you are unsure how to find a good lender, do some research on the internet. More often than not, you will find some reviews from previous customers that might have something to say about a particular lender.
You always want to make sure that a lender has positive reviews. If you find that the reviews are mostly negative, on the other hand, you might assume that something is amiss with that lender. That lender might not be very professional or it might even be a scam.
But if a lender has many positive reviews, then you can be quite sure that the lender actually cares about its clients and fulfilling their needs. This is important because there are many scams out on the internet. You might think that you’re dealing with a real lender when in reality, you’re only dealing with a scammer.
Always be sure to be patient when looking for a lender. Finding the right one often takes a while. Rushing through the process will likely get you a lender that isn’t really right for you.
You might end up having to pay very high interest rates as well even when there were better options right around the corner. So before you choose a lender, be sure to consider all of your options first.
Consider Making a Down Payment on a Car
If you have a very low credit score, you might find it difficult to get a loan from any lender. If this is the case with you, you might want to think about making a down payment on the car you want. Keep in mind that you should stick with cars that are realistically within your price range.
Low-credit loans won’t be able to help you get big, luxury cars. Making a down payment on a car can be beneficial for a variety of reasons. For one, it improves your odds of being accepted for a car loan.
This is because making a down payment shows that you have financial responsibility and it might even improve your credit score a little bit. Of course, in order to make a down payment, you will have to save up a bit of money first. This may be difficult if you are tight on cash and in a tough financial situation, but it is possible.
Save Your Money
A good way to do this is to save up a bit of money every month for several months in a row. Over time, you will build up a nice little bundle of savings that you can use to put toward a down payment. Doing this can not only bring you one step closer to getting the car loan you want but it will also bring down the interest rate of the loan you plan on applying for.
Making a down payment on a car also makes it more likely that you will get approved for a car loan.
While it will not guarantee that you will get a car loan, your chances will be much better. If you combine making a downpayment with getting a successful pre-approval, then your odds of getting a real loan approval would be very good.
All you need is a bit of patience. Once you build up enough money over a few months for the down payment, things should start looking up even if your credit score is still quite bad at the time of your application.
How to Finance a Car
Learning how to finance a car doesn’t have to be difficult, but there are certain things you should consider. For example, you should consider getting a pre-approval first before you apply for a real loan so you know your chances of getting approved. You should also think about a down payment for the car that you want as this may also increase your approval chances.
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