Driving can be a major expense but a necessary one for many Canadians. A big part of the cost of vehicle ownership is paying off your car loan, which can quickly become a burden if you’re juggling other types of debt, emergency expenses, or loss of income.
The average new car loan in Canada is over $33,000, with average monthly payments coming in at $539 over 72 months. It’s a significant financial commitment, and many worry about taking out car loans with bad credit in Canada in case they fall behind on payments.
Fortunately, car loans can be effective tools for fixing bad credit after you’ve filed a consumer proposal or bankruptcy. As long as you know how to avoid predatory high-interest car loans and how to get the best rate despite your credit history, you can start to rebuild your credit score and get a new vehicle if you need one.Let’s Talk
What Happens to Your Credit Score in Insolvency?
When you file a consumer proposal or bankruptcy, you should expect your credit score to take a hit. Filing for insolvency is considered defaulting on the debt, and the accounts included will report a lower rating. This information can remain on your credit history for several years, depending on the type of insolvency you file.
While it can be tough dealing with a poor credit score, often, those who file for insolvency already have bad credit due to late or outstanding payments. Insolvency is the first step in resetting your finances, giving you a chance to start over. The LITs at David Sklar & Associates can help you understand how a consumer proposal or bankruptcy will impact your credit and give you the tools you need to rebuild your credit.
What Happens If You Can’t Keep Up with Car Payments?
Suddenly finding yourself unable to keep up with car payments can feel like a nightmare. If you’re considering insolvency for the first time, and your car loan payments are contributing to your financial stress, you may want to consider voluntary surrender.
The voluntary surrender of a vehicle in Canada is a way of getting out of car loan debt when you file a consumer proposal or bankruptcy. Filing for insolvency does not discharge you from any secured debts, i.e., debts attached to an asset. This includes car loans. Unfortunately, cars are usually depreciating assets, meaning you can wind up owing more on the loan than the vehicle is worth. Even if the lender repossesses your vehicle, you can still end up owing the lender, leaving you with debt remaining and no vehicle.
When you voluntarily surrender your vehicle, you return it to the lender at the time that you file for insolvency. Upon returning the vehicle to the lender or the dealership, they sell the vehicle and put the proceeds toward your outstanding car loan. They should send a statement of realization informing you of the funds they’ve recouped, the penalties you face for defaulting, and how much you still owe.
However, the remaining debt is now unsecured debt, as there is no longer any asset. Your remaining car loan can now be included in a consumer proposal or bankruptcy. If you can get by without a vehicle for a period of time or you have a backup, voluntary surrender is a good idea for dealing with a car loan you struggle to afford.
Rebuilding Your Credit Score After Bankruptcy
Learning how to rebuild credit is an important part of the insolvency process, and it’s something you can learn as part of our credit counselling at David Sklar & Associates. Canadians do not receive much in the way of formal education on real-life financial decisions, and many people dealing with debt can benefit from credit counselling. You will learn financial skills such as:
- Identifying and handling negative financial habits
- Creating and managing budgets
- Using credit effectively to rebuild your credit
- How to save more money
Better financial habits can help you make the most of insolvency. Not only will you start fresh, but you can walk away with the skills you need to save an emergency fund, rebuild your credit, and come out stronger overall.
Saving an emergency fund and accessing credit will help you avoid filing for insolvency a second time. Having money available to pay for an emergency can help you avoid bankruptcy via car breakdown or other unexpected expenses.
Bad Credit Car Loans: How to Find What Works
It is possible to get a bad credit car loan even if you’re in the middle of a consumer proposal or emerging from bankruptcy. Keep in mind the risks that come with taking out any loan while you have a bad credit score. Lenders will be more likely to demand high-interest rates. Unless you’re able to keep up with the payments, you can wind up exactly where you started.
Make sure that the bad credit car loan you apply for addresses your needs. If you just need a practical vehicle to get to work, now may not be the time to splurge on luxuries. Avoid stretching your budget if you’re concerned about the financial impact.
There are also other ways to rebuild your credit than a car loan. If you live in a place where you can take public transit or use a family member’s car to get around, responsibly using a secured credit card can also help you rebuild your credit.
How to Get a Car Loan with Bad Credit
Getting a car loan with bad credit can feel like an uphill battle. For many Canadians, driving is not a luxury, as they need their vehicles to get to work, run errands, and get around. While dealerships and auto lenders can be quick to advertise bad credit car loans, they may come with high interest rates or other unfavourable terms.
The key to getting a car loan with bad credit is doing your research and crunching the numbers. These steps can help you find a bad credit car loan that will help you get a new vehicle and rebuild your credit score for the future.
1) Check Your Credit Report
What is your credit score now? Your score is a number between 300 and 900 that is determined by several factors, including your history of repaying debt, available credit limit, and how much you already owe. A consumer proposal or bankruptcy can have a significant impact on that score.
In Canada, a poor credit score is generally anywhere below 574. You can get your credit report and credit score free through Equifax, one of the two bureaus that provide credit reports in Canada. It will also include information such as the factors contributing to your score. This information can help you rebuild.
2) Determine How Much You Can Afford
Look honestly at your income, debt repayments, and basic expenses, then calculate all of the costs of ownership to find out how much money you can borrow to buy your next vehicle. You’re more likely to have a loan application accepted if you know that you can afford it. It’s important to note that making numerous loan applications can have a further adverse effect on your credit, so it helps if you’re confident about getting the loan.
3) Save a Down Payment
Zero down, bad credit car loans can feel like tempting offers when you’re short on cash and paying off a consumer proposal, but with interest rates, they can cost more in the long run.
Lenders want down payments and may offer to better interest rates if you have money upfront. A down payment means you’re less likely to owe more than the car is worth if you can’t keep up with payments, and financiers may be more likely to approve your application knowing you’re contributing to the up-front cost of a car.
4) Get a Co-Signer
Lenders charge higher interest rates when they perceive a borrower to be at a higher risk of non-payment. Finding a friend or family member with a better credit history to co-sign can provide them with reassurance that the loan will be paid back.
Keep in mind that co-signing a loan means the co-signer can wind up responsible for the full loan amount if you cannot pay or go into insolvency. This could have repercussions for your relationship with the co-signer.
5) Explore Your Lending Options
Getting a car loan with bad credit and no co-signer can be a bit more challenging, but there are still options. Signing up for the first offer a car dealership provides can leave you on the hook for more than you need to pay. Do your research on lenders offering bad credit car loans in Canada and find out which one makes the most financial sense.
It’s not impossible to find bad credit loans in Toronto or other parts of Ontario, whether it’s for a car, a credit card, or another type of loan. Responsibly getting credit once again is necessary if you want to rebuild your credit history. People with a poor credit history may find it harder to get loans, credit cards, mortgages, and apartments for rent. In some cases, it can even impact job prospects, depending on the industry. Finding a bad credit car loan doesn’t have to mean exposing yourself to predatory rates, and it can help you recover your credit.