How to Get Approved for a Car Loan with Bad Credit
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For Canadians, especially those living outside of city centres, a car is not a luxury. It is a necessity.
Did you that in 2019 there were 35.7 million motor vehicles registered in Canada? This number from Statistics Canada, suggests that there is nearly a vehicle per person! Since cars and trucks can be so expensive, many people would not be able to get one without a car loan to finance the purchase. And yet, car loans are not easy for people with poor credit histories.
Wondering how to get a bad credit car loan? This guide explains how to get a car loan despite a bad credit score, what bad credit means and what you need to know about car financing.
How can I get a car loan with bad credit?
In many cases, it is still possible to get auto financing despite bad credit.
If your credit score is not what you want it to be, it may feel like a serious roadblock to buying a vehicle. Good news. Bad credit may not mean getting turned down for a car loan, although it can make the process more difficult.
Lenders will also look at the size of your down payment, your financial statements and your employment history. Being able to show proof of employment and regular income is important. Would-be borrowers can improve their chances of getting approved by getting a trusted family member or friend with a better credit score to be their co-signer or guarantor.
When you apply for a car loan, terms will not be as favourable as those of people with a higher score. Be aware that the loan may be smaller, limiting the amount you can spend on a vehicle. The interest rate will certainly be higher. Traditional lenders may charge in excess of 10% to 15%. Online and specialty lenders' rates can reach more than 30%! If a bad credit car loan is your only option, consider going for the smallest loan and the shortest terms that you can comfortably handle. This will offset the higher interest.
Wondering what terms you could qualify for on your car loan? Get a bad credit car loan quote now.
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What is bad credit?
Bad credit means different things to different people. For lenders, there is a big difference between a borrower with a fair credit score and regular income and someone with a poor credit score who is underwater on their current loans. Under the right conditions, a large bank or a local credit union may lend to the former. Below we explore how credit scores work.
Credit scores are assigned by TransUnion and Equifax. These are the two major credit bureaus in Canada. They rank consumers' history of using credit and assign it a number from 300 to 900, which corresponds to a rank from poor to excellent.
| Credit quality | Poor | Fair | Good | Very good | Excellent |
|---|---|---|---|---|---|
| Credit rating | 300-559 | 560-659 | 660-724 | 725-759 | 760-900 |
Traditional lenders look for borrowers in the good range or higher. The credit score, the more likely you are to qualify for larger loans and lower rates.
What makes a score good or bad depends on a number of factors including:
- Your payment history: Do you pay your bills on time every time?
- Your credit utilization ratio: What percentage of available credit do you use? Having maxed-out credit cards brings a score down
- The length and depth of your credit history: How long have you had your oldest credit card? Have you previously had a paid-off loan?
- Credit inquiries: Lenders interpret applying for many credit credits and loans in a short period of time as problematic. It has a short-term negative effect.
How do car loans work?
How do interest rates affect my loan?
In the example below, you can see how interest rates affect a loan. Both loans A and B are for $10,000. One has an interest rate of 5% and the other 25%. Just based on the difference in interest rates, Loan B will cost $2,280.03 more in interest than Loan A.
| Loan terms | Loan A $10,000 | Loan B $10,000 |
|---|---|---|
| Interest rate | 5% | 25% |
| Loan length | 24 months | 24 months |
| Monthly payment | $438.71 | $533.72 |
| Total interest | $529.13 | $2,809.16 |
| Total | $10,529.13 | $12,809.16 |
How does the duration of a loan affect the cost?
Here is a similar $10,000 loan, but with different lengths. Loan A is due over 24 months, whereas Loan B is repaid over 60 months. Both have a 15% interest rate. Even though Loan A has larger monthly payments, this borrower would be saving $2,637.16 in interest. This is why it is important to evaluate your re-payments and consider making this time period as short as possible. Better cash flow and more manageable payments are legitimate reasons to choose a longer repayment schedule, but be aware of the additional cost of this financial flexibility.
| Loan terms | Loan A $10,000 | Loan B $10,000 |
|---|---|---|
| Loan length | 24 months | 60 months |
| Interest rate | 15% | 15% |
| Monthly payment | $484.87 | $237.90 |
| Total interest | $1,636.80 | $4,273.96 |
| Total | $11,636.80 | $14,273.96 |
These examples demonstrate how time and interest rates affect car loans, and why it is so important to shop around. Compare loan plans today to find a policy and interest rate that works for you.
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Can I apply for a car loan online with bad credit?
Applying with an online lender can make sense when you have bad credit. It may even be the best option.
Specialized lenders exist that are willing to lend when traditional banks are not. Applying directly with dealerships is another alternative. If you go this route, work with a reputable one and check the terms of your car loan carefully. Some dealerships take advantage of customers.
Request a car loan quote from our online lending partners.
What are the pros and cons of a bad credit car loan?
For some borrowers, using a specialty lender to get a car loan with bad credit makes sense. First and foremost they are a way to access credit for a vehicle. Here are the main points to consider before signing up for a bad credit car loan.
Advantages
- Gets you in a car
- Will improve credit score (assuming you pay off in time each month)
- Opportunity to prove your creditworthiness and make it easier to get your next loan or credit card
Disadvantages
- Very high-interest rates
- Smaller loans
- Difficult to negotiate terms
- Not working with a traditional lender
- It may require a co-signer
Can I get a car loan with bad credit and no co-signer?
Applying for a car loan with both bad credit and without a co-signer limits one’s financing options. Lenders use credit history to evaluate if a lender will pay back a loan. Borrowers with no or poor credit history benefit from having a co-signer. That person helps reassure the lender that someone will pay back the loan. Without one, alternative lenders, particularly online lenders, are the best option. Unfortunately, they too will consider a borrower with bad credit and no co-signer as a risk. Expect higher interest rates and less favourable terms.
Still, if you can get approved, it is a way to get a car. Get a car loan quote today to see if you qualify.
What is the average interest rate for a car loan with bad credit?
Bad credit means different things to different people. Car loan interest rates range from 0% to in excess of 30%. The rate changes dramatically depending on the lender, the borrower, the loan amount, the loan length and much more.
Traditional lenders and banks should offer loans under 6.99%. Borrowers with lower scores going through specialty online lenders should usually fall between 7.99 to 29.99+%.
Good to know
HelloSafe's car loan calculator can help you calculate how much interest will cost you on your next car loan.
How do you refinance a car loan with bad credit?
Refinancing a car loan means ending one loan and starting another. The new lender buys your remaining debt and extends new terms. When you have bad credit, this is more difficult.
Nevertheless, if your financial situation has improved since you took out your car loan, a new lender may extend better terms to you. Ask your bank or credit union. You may be able to lower your monthly payments by lowering the interest rates or extending the length of your car loan.
Does getting a car loan improve my credit score?
Good news! Paying your car loan back on time every month is a fantastic way to improve your credit score. This shows financial institutions that you can successfully pay off your debts. This will gradually improve your credit score when paid back on time every time.
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