It’s not easy securing financing when your credit score is low. Some lenders might avoid you. Nonetheless, you do have options.
What is a car loan and why do I need one?
If you’re looking for a car loan and you have poor credit, the odds are stacked against you. But you can make it work.
A can loan is an amount of money you borrow from a lender – a bank, online lender, car dealership – to buy a car. It’s a legal agreement where you agree to repay the loan plus interest in regular installments over a set period of time.
You need a loan if you’re unable to cover the cost of a vehicle by yourself. Essentially, a lender will purchase the car on your behalf – over time through installments, you buy the car from them little by little.
Car loans typically span 36-72 months (three to six years). If you are paying a loan back in 36 months, your monthly payments will be considerably higher but you’ll save money over the course of the loan. The longer your loan runs, the more you’ll end up paying overall, with the trade off that your monthly payments will be smaller and more manageable.
What is a credit score and why does it matter?
Your credit score is a record of your borrowing (and repaying) history. Lenders report your borrowing behaviour to credit bureaus, who manage your score. Credit scores in Canada are three-digit numbers that range from 300-900. Anything under 600 is generally considered by lenders to be a bad score, with some considering anything under 660 to be bad. A poor score will make it difficult (but not impossible) to secure a loan.
You can build your score with positive behaviour, like making regular on-time repayments on a credit card, and consistently paying your bills on time. Meanwhile, negative behaviour will cause your credit score to tank – things like regularly missing loan repayments, maxing out your credit cards or, worst yet, being referred to a collections agency or declaring bankruptcy.
The reason your credit score is so important is because it illustrates to lenders how reliable you are at borrowing their money and paying it back. If you’ve established a history of unreliability, your score will be bad and lenders might shy away from lending to you. Similarly, if you’re a newcomer and haven’t established any credit history yet, lenders will be reluctant to lend to you because they don’t know how reliable you are.
Understand your credit score
If you don’t know your score, you can easily find it out. You can get a credit report directly from Equifax and from TransUnion, which are the two consumer credit bureaus in Canada. You can also access your score for free from online fintech companies Borrowell, Intuit Credit Karma, and Mogo.
Can you qualify for a car loan with a bad credit score?
In short, yes, you can qualify for a car loan with bad credit. But there are some things you need to know.
There are lenders who specialize in “bad credit” car loans. Since your score is low, you’re going to pay extra – that’s just how it is. Lenders charge extra for borrowers with poor credit, because they’re taking an extra risk on trusting you.
With a bad credit score, you’re unlikely to qualify for a loan through a traditional lender like a bank or credit union. And through alternate lenders, who might take you on, you won’t receive the best loan rates.
What lenders consider for bad credit car loans
The interest rate on a bad credit loan is going to be considerably higher than it would for a good credit loan. Considerably. Where someone with good credit might pay 4%-8% interest (it’s generally 0.5-1.5% over the prime rate), someone with poor credit might pay 12%-30% (or more). The rates will depend on the individual, their credit history, credit score, income, and assets.
In some cases, if you have poor credit, having a co-signer can help you get a better loan. A co-signer is someone willing to put their name on a lease alongside yours. It means they trust you to make your payments, because if you fail then their credit will dive alongside yours. If you have a co-signer with good credit, their signature on the lease can boost your chances for a better deal.
Income, employment, history
If your credit is poor, some lenders will consider other factors that might convince them to lend to you. Most will want you to have a minimum monthly take-home income of at least $1500, although some want to see a higher income than that. They may also want proof of employment, such as paystubs or a letter from your employer. Some lenders will also want to see your financial history to better understand your ability to take on a loan, such as bank and credit card statements.
Best practices for securing a car loan with bad credit
Although your traditional loan options might be limited with bad credit, you still have options. There are plenty of lenders willing to take on borrowers with poor credit – some even specialize in this. Don’t just take the first deal you get with the first dealer you talk to. There are plenty of online companies that can help you find the right deal for your circumstances, so do your research.
You can increase your chances of getting approved for a loan with a down payment. A down payment is a portion of the full cost of the car up front, which reduces the cost of the loan and lowers your monthly repayments. It also proves to lenders you’re financially capable of managing money. If you’re able to pull together a down payment to kick things off, you’ll be in a better position. You can find online car loan calculators that will illustrate how different down payment amounts will affect your car loan payments.
Buy a cheap car
The interest on a bad credit loan is going to be high. So you want the loan to be as small as possible. Ideally, you want your monthly payments to be low and the interest you pay minimized. Buying a cheaper car might be in your best interests, so you don’t overextend yourself each month.
Buy a car outright
If you are able to pull together the funds and you manage to find a cheaper car you can afford, buying a car outright will obviously be your best approach. If you have the funds to buy the vehicle with your own money, you obviously don’t need any help from a money lender. Of course, this option isn’t for everyone.
Rebuild your credit to get a loan with better rates
It makes sense that if you’re reading this you’re interested in a car loan now. But if you don’t need a car immediately, rebuilding your credit first would allow you to get a better car loan with access to traditional lenders.
Rebuilding your credit isn’t a quick fix, though. It requires patience and dedication to good spending habits. It takes time, but it’s worth it to have access to better rates, bigger loans, and more financial freedom overall. By doing the right things, you could begin to turn your credit score around in a matter of months, and within a few years you could have a good score.
Sam Boyer spends, invests, budgets, and writes. He enjoys writing about things he wishes he’d learned earlier — like spending, investing, and budgeting. A journalist originally from New Zealand, Sam has written extensively about consumer affairs, insurance, travel, health, and crime.