How to Get a Car Loan in Canada When You Have Bad Credit
Automobiles are an essential part of life for Canadians. Many of us rely on them to earn our living, so when our car breaks down and needs to be replaced, it’s not something we can ignore for long. But if you find yourself suddenly in need of a new car, you’ll probably need to take out a loan for it. And if you have bad credit you unfortunately may not qualify for a loan from a traditional bank or credit union.
Those of us with credit scores that are still a work in progress may need to go through a non-traditional lender in order to get back on the road. If you fall into that camp, you’re not alone. Before you set out to get a loan you can take advantage of this primer that we’ve put together for those with low credit scores who are in need of an auto loan.
In This Article:
What Is a Bad Credit Score?
Bad credit car loans are only necessary if you have a low credit score. Your credit score is a three-digit number between 300 and 900 and is a quick way for lenders to determine how risky it is to lend you money. Two credit reporting agencies in Canada, Equifax, and Transunion, compile your credit score and they take many factors into account when determining what number to assign you. A higher number means you’ve used your credit tools responsibly; a lower number means you’ve had a more uneven past with credit.
You can check your credit score by using a free tool like Mogo, or by paying for a copy of your credit report through Equifax or Transunion. If your credit score is above 650, you probably qualify for a traditional car loan. If your credit score is below that threshold, you’ll have to apply for a bad credit car loan.
Can You Qualify for a Car Loan with a Bad Credit Score?
Yes! Bad credit happens, and while you won’t qualify for the lowest interest rate or the most favourable loan terms, it is possible to get a car loan in Canada if you have bad credit or even if you’ve declared bankruptcy in the past.
With bad credit car loans, you’ll still finance your car over a term, and make payments on the loan principal plus interest. There are, however, two big differences between a bad credit car loan and a traditional car loan:
- The lender – You may not qualify for a car loan from a bank or a credit union, in which case you’ll need to go through a non-traditional lender.
- The interest rate – If you have good credit, you can apply for a loan through banks or credit unions, which typically offer low interest loans. A bad credit car loan interest rate will be higher, which means more of your monthly payment is going toward interest.
Where to Find Bad Credit Car Loans
If you have bad credit and your loan application is rejected by a bank or other financial institution, don’t give up. Now is the time to start shopping around.
Though it may be tempting to go to your nearest car dealership and sign for the first deal they’ll give you, we recommend being patient and contacting at least a few different lenders so that you can secure the best possible terms and the lowest interest rate available to you. A good way to research what’s out there is to use online car loan search platforms, such as:
CarLoans411 works primarily with Canadians that have poor credit or no credit, including immigrants and those with a bankruptcy or consumer proposal in their credit history. They have hundreds of dealership partners throughout Canada that offer financing for new and used cars, vans, trucks and SUVs.
The application process for CarLoans411 is free. The initial prequalifying procedure entails filling out some basic personal info, like date of birth, address, phone number, housing costs, and monthly income. A CarLoans411 representative will then call you to discuss local vehicle and financing options that are available to you based on the info you submitted. The application does involve a credit check, but almost all applicants are approved for auto financing of some kind, provided they meet the minimum income requirement of $1,600 per month.
Down payments are not required and interest rates vary depending on an applicant’s financial profile.
CarLoansCanada.com has a convenient pre-approval process that connects your application with local dealers. If you have a specific used vehicle in mind, these lenders will pre-approve your application with interest rates that range from 4.95% to 29.99%, and loan terms from 12 to 96 months.
When you apply for a pre-approved loan through CarLoansCanada.com, your application won’t trigger a hard credit check on your account. Hard credit checks cause your credit score to drop a few points, so the Car Loans Canada platform can be a useful tool to estimate the interest rates that are available to you if you are still in the research phase of your car buying journey.
You can learn more about this platform by reading our full CarLoansCanada.ca review.
Loans Canada specializes in finding lenders for borrowers with low credit scores, including those who have recently filed for bankruptcy or who have entered into a consumer proposal. Potential borrowers can seek out a loan for a new or used car, and the types of loans offered are quite broad: interest rates range from as low as 0% and up to 46.96%, loan amounts from $500–$300K, and terms from 3 months–5 years.
One thing I like about Loans Canada is that those who have borrowed with lenders in the Loans Canada network can rate and review their lenders, allowing you to check out a lender’s customer service record before you sign for a loan with them. A less impressive aspect of the platform is that the loan can’t be processed online from start to finish; you’ll submit your application, and then the prospective lenders you’re matched to will call you with their offers.
You can learn more about this platform by reading our full Loans Canada review.
LoanConnect is another lending search platform that offers car loans for Canadians with bad credit and those who are going through consumer proposal or bankruptcy. LoanConnect.ca will direct potential borrowers to a network of local lenders with interest rates ranging from 10% to 36.00% (APR based on personal credit) and loan terms from 12 to 60 months.
You can learn more about this platform by reading our full LoanConnect.ca review.
Getting Approved for a Bad Credit Car Loan in Canada
Getting approved for a bad credit car loan in Canada is about more than just your credit score. Your lender will consider many factors to determine whether you can pay back your loan, including:
- Down Payment – Saving a large down payment will indicate that you are financially prepared to take on a car loan. If possible, save several thousand dollars. The more you can save, the better. Aside from being viewed favorably by lenders, making a large down payment will also benefit you because you’ll have a smaller monthly payment and less interest to pay over the term of your loan.
- Financial Statements – To ensure you can afford to pay back your car loan, your lender may request your financial statements. Be prepared to turn over several months of banking history on your chequing and savings accounts, along with proof of investments or debt you may hold.
- Employment History – Your lender will want to ensure you have reliable employment, either by requesting copies of your pay stubs or written proof of employment.
- Inexpensive Car – With bad credit loans, the smaller the loan, the better. To keep your loan amount small, choose an inexpensive car. Remember, you’ll already be paying a significantly higher interest rate since this is a bad credit loan, so it’s best to minimize the amount you’ll pay in interest over time by keeping the loan principal as low as possible.
Play around with a free car loan calculator to get a better sense of how increasing your down payment amount or finding a less expensive vehicle will reduce your car payments. The more manageable your car payments are relative to your income, the more likely you are to be approved for a loan.
Take the Opportunity to Improve Your Credit Score
Bad credit will make life more expensive for you, but it doesn’t need to be that way forever. If you have bad credit, take a moment to reflect on why your credit score is low, and take steps to remedy that. Here are some ways to improve your credit score:
- Payments – Whether it’s that department store credit card or your monthly power bill, pay your bills on time, every single time.
- Make Minimum Payments – If you can’t afford to pay off your credit card in full, don’t ignore your monthly statement. Make at least the minimum monthly payment, which will preserve your credit score and protect you from increased interest rates on your existing debt.
- Keep Your Oldest Credit Tool – The older your credit history, the better, so keep your oldest credit card open, even if you don’t use it.
- Keep Your Credit Utilization Rate Low – Don’t spend more than 35% of your available credit limit on any one credit tool.
Bad credit doesn’t need to mean that you’ll never qualify for a car loan in Canada. By following the guidelines set out above and shopping your application around to several lenders, you should be able to find a loan that suits your needs and budget. Once you’ve secured your loan, you can begin rebuilding your credit score so that your next car loan can come from a traditional lender with a lower interest rate.