A vehicle is a significant expense for the average household. But for many Canadians, it’s necessary, as it allows them to drive to work, run errands, take their kids to hockey practice, and more.
There’s no denying that owning a vehicle offers tremendous benefits. Unfortunately, cars don’t come cheap.
According to the December 2022 AutoTrader Price Index, the average cost of a new vehicle ranges from $45,023 to $68,824, depending on the body type (car, SUV, truck, etc.). Used vehicles also come with steep price tags, with average prices ranging from $30,801 to $45,426.
Like most people, you’ll likely need to finance a portion of your vehicle purchase, which means you’ll need to apply for a car loan.
However, if you’re credit is in rough shape, you’ll face hurdles in getting approved for a car loan, as lenders will view you as a high-risk borrower. You may also worry about taking on an auto loan in the first place, fearing that you’ll fall behind on payments.
Fortunately, acquiring a vehicle in Canada with bad credit is still possible with smart budgeting and the right lender. As long as you steer clear of predatory, high-interest loans and do your research to get the best rate, you can get the vehicle you need.
In this article, we’ll walk you through how to maximize your chances of getting a car loan despite a poor credit score.
What is a bad credit car loan?
Bad credit auto loans are debt products explicitly geared for borrowers with poor credit scores. But what’s considered a “poor” credit score?
According to Equifax (one of Canada’s two credit bureaus), it’s any score below 580. Here’s a distribution of credit score ranges according to the credit bureau:
- 800 – 850: Excellent
- 740 – 799: Very good
- 670 – 739: Good
- 580 – 669: Fair
- 300 – 579: Poor
In general, once your credit score dips below 670, you’ll face noticeable challenges in getting approved for a car loan. Remember, though, that the Equifax credit score ranges are guidelines – each lender will have its unique standards.
The importance of setting realistic expectations
Getting a car loan with bad credit is possible. You may qualify for one even if you’re in the middle of a consumer proposal or bankruptcy.
However, always be mindful of the risks of taking out any loan while you have a bad credit score. Lenders will more likely demand high interest rates, resulting in larger payments. You must keep up with these payments to avoid tarnishing your credit further and landing in deep financial trouble. If your car loan payments become unmanageable, you may have to surrender your vehicle.
To put things in perspective, the average interest rate on a car loan was 8.03% in January 2023. For a vehicle with a purchase price of $35,000 and a 10% down payment, the monthly payment works out to $445.79 for 72 months. And that’s assuming you can secure an 8.03% rate with bad credit.
Ensure that the bad credit car loan you apply for addresses your needs. If you need only 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.
Steps for getting approved for a bad credit car loan in Canada
Getting a car loan with bad credit can feel like an uphill battle. While dealerships and auto lenders advertise bad credit car loans, they may come with high-interest rates, unfavorable terms, and onerous fees.
The key to getting a bad credit auto loan is extensive research and plenty of number crunching. By doing so, you can land a solid deal that fits neatly within your budget. The steps below will help you reach that goal.
1. Check your credit report and credit score
Before scouring the market for car loans, assess your credit standing. That way, you can manage your expectations and seek financing deals where your chances of approval are high.
Your credit score is a three-digit number that measures your creditworthiness from lenders’ perspectives. As mentioned, any score below 670 is considered “fair,” and those below 580 are deemed “poor” by many lenders. The lower your score, the fewer loan options will be available to you and the higher the interest rate you can anticipate paying.
According to Canadian Auto Brokers, a brokerage firm specializing in auto loans, these are the typical interest rates that would apply for borrowers with average to below-average credit scores. For this example, the brokerage firm assumes the following scenario:
- Vehicle purchase price of $36,000
- 10% down payment
- seven-year loan term
|Credit Rating||Credit Score||Interest Rate (Hypothetical)|
|Good||650 – 719||4.5%|
|Fair||600 – 649||10%|
|Poor||300 – 599||15%|
As you can see, you can expect most lenders to offer double-digit interest rates if your credit score falls below the average in Canada, which is around 650.
Will your current credit score hurt your chances of qualifying for the rate and terms you’re seeking? If so, consider taking steps to fix it to expand your financing options. You can improve your credit score in just a few months with some minor adjustments.
In addition, it’s also worthwhile to access your credit report and review it to make an honest assessment of your current debt situation.
You can find your credit score and acquire a copy of your credit report for free by contacting Equifax or TransUnion.
2. Determine how much you can afford
The last thing you want as someone with bad credit is to damage your credit further by taking on an extra loan you can’t handle. Therefore, it’s crucial to set a realistic car loan budget.
First, assess your income, household expenses, and debt payments to determine how much money you have leftover monthly to dedicate to auto loan payments.
Second, calculate the additional costs that come with car ownership. Primarily these include fuel, maintenance, registration, and insurance. Be sure to account for emergency repairs as well.
How to calculate the optimal car loan
When determining your ideal loan principal and payment amount, you can use a car loan calculator, such as the one provided by Scotiabank. Be sure to consider the following factors:
- Term length - Most auto loan terms range from three to seven years, though some lenders are willing to issue loans for up to 10 years. The shorter the term, the lower the interest rate and the higher the payment amount you can expect and vice versa.
- Interest rate - interest rates on bad credit car loans can vary widely – anywhere from 10% to 30%. The main factors that influence the rate you receive are your income, down payment, and credit score. Your loan term length, car make, car model, and loan amount also play a role.
- Loan amount - The greater your financing needs, the more risk your lender assumes in approving your loan application. Therefore, you can expect a higher interest rate with a larger loan.
- Fees - Be sure to account for origination fees, administrative fees, and other extra costs in your car loan budget. These will increase your overall interest rate and payment amount.
3. Save for a down payment
Some lenders offer zero-down financing deals in the bad credit car loan market. These loans can be enticing offers when you’re short on cash (and perhaps paying down your consumer proposal). However, the zero-down requirement typically comes with a sky-high interest rate, which can cost you a pretty penny over the long run.
Most lenders prefer to have car buyers contribute a down payment. A down payment means you’re less likely to owe more than the car is worth if you can’t keep up with payments. It also demonstrates commitment and financial responsibility. As a result, they’ll be more likely to approve your application knowing – and offer you a lower interest rate than they would otherwise.
While 10% is a reasonable down payment for a car purchase, aim for 15% to 20% if you’re credit is poor.
4. Get a cosigner
Lenders charge higher interest rates when they perceive a borrower as having a higher risk of non-payment. Finding a friend or family member with a better credit history to cosign can reassure them that the loan will be repaid. As a result, they’ll be more willing to assign you a lower rate.
Remember that cosigning a loan means the cosigner is legally responsible for the entire loan amount if you cannot pay or go into insolvency. This consequence could negatively impact your relationship with your cosigner if you fail to deliver on your payment obligations.
5. Explore Your Lending Options
Avoid taking the easy route by signing up for the first offer that comes your way – you could be on the hook for more than you can afford. Take your time to evaluate lenders to secure the best deal possible.
Here are some financing options to explore:
Banks and credit unions. Traditional, top-tier lending institutions cater primarily to borrowers with solid credit scores. Not surprisingly, applying for an auto loan if you’re credit is in the dumps will be challenging, if not impossible. However, suppose your credit score is slightly below what’s acceptable. However, if your credit score is slightly below what’s acceptable, it’s worth a try, as these financial institutions offer competitive rates.
Dealerships. Many dealerships have in-house financing departments or have business relationships with banks that provide auto loans. Usually, they’ll be willing to approve those with bad credit and are open to negotiation. But you’ll need to provide a sizable down payment to access the best financing conditions. Just be aware that the employees earn a commission, so they may employ unscrupulous sales tactics and try to take advantage of you.
Alternative lenders. If traditional lenders like banks and credit unions reject your car loan application, you can explore the alternative lending market. here’s a wide range of options, but remember that some lenders will charge exorbitant interest rates and offer inferior loan terms.
An excellent place to begin your search is to visit online loan comparisons websites, such as Loans Canada, LoanConnect, and Car Loans Canada (*David Sklar & Associates does not endorse these sites – they are only suggestions for readers to begin their search for bad credit card loans). These platforms work with various lenders – they can connect you with one that’s most suitable for your credit score, income level, etc. As a result, you can save time and effort compared to finding each lender independently.
One last tip: if you find a lender that piques your interest, be sure to get pre-approved for financing. While a pre-approval isn’t a guarantee, you’ll at least know the maximum loan amount you could qualify for. This information will give you extra leverage when negotiating terms and interest rates with the lender.
Bad credit car loan checklist: how to boost your chances of approval
If you’re looking to maximize your chances of getting a car loan in Canada with bad credit (and without breaking the bank), do the following:
- Make a large down payment (20% if possible)
- Choose a loan term no longer than seven years
- Pay off your existing debts as much as possible before applying
- Lower your credit utilization before applying
- Offer to put up an asset as collateral
- Budget for a car below your means
- Apply once your income has increased
- Find a cosigner
- Trade in your existing vehicle, if you have one
- Never settle for the initial offer – always negotiate with your lender
How filing a consumer proposal can help you get a car loan
A consumer proposal will impact your credit score and remain on your credit report for three years after making your last payment. But if you have severe debt problems, enrolling in this debt relief program could provide you with the help you need to rebuild financially.
Suppose your poor credit was already hampering your ability to secure a car loan. If so, you might think your odds will worsen by filing a consumer proposal. However, a consumer proposal may actually improve your chances of qualifying for a car loan, despite your poor credit.
The reason is that once your creditors accept your proposal, your monthly debt payments will fall considerably. Naturally, this will lower the risk of defaulting on a car loan, as you now have more money to make timely payments. As a result, you’ll instantly become a more appealing borrower in the eyes of some lenders.
Yes, traditional lenders still won’t be willing to approve you for financing. However, many alternative lenders are available that specialize in providing car loans to individuals enrolled in a consumer proposal.
Final thoughts on bad credit car loans
You’ll face more challenges getting a car loan with bad credit than someone with a good score. But it’s not as impossible as you might think. The key is to set realistic expectations, one of which is settling for a higher-than-average interest rate.
Be conservative and purchase a vehicle that fits comfortably within your budget, so you’re not saddled with a demanding loan. If you make your payments on time, your credit score will gradually improve. Once your credit score is high enough, you can refinance your car loan at a lower rate.
Is your current debt situation preventing you from getting approved for a car loan? If so, you’ll need to work on rebuilding your credit score. However, if you’re overwhelmed by your debts and looking for a solution, debt relief options are available to help get your finances in shape.
At David Sklar & Associates, we help people from all walks of life solve their debt problems. If you need a helping hand, don’t hesitate to contact us to book a free, no-obligation consultation.Let’s Talk