Bad Credit Car Loans

If you are in search of a new car, Van, SUV or pickup truck, you may already know that car financing can be tricky with less than perfect credit score. Thankfully, in Canada there are plenty of reputable bad credit car loan providers that will work with you regardless of your credit situation.

You are closer than you think to driving away in your new car. We’ve put together a list of the most reputable bad credit car loan providers in Canada. Take a look below and click “apply now” next to a company of your choice to start an online application. You can also “pre-apply” for a fast bad credit car loan here, and we will connect you with the most suitable provider.

You can pre-apply here at Smarter Loans and we will find a suitable lender for you.

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Top Bad Credit Car Loans Providers in Canada

Company

Amount

Interest Rate

Reviews

Terms

$3,500 - $49,500

8.99% - 29.5%

12 - 84 Months

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$5,000 and up

9.9% – 31%

24 – 84 months

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$5,000 - $40,000

Starting at 2.9%

12 - 72 Months

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Bad Credit Car Loans Explained

One of the most important, big-ticket purchases made by consumers today is the acquisition of a new/used car. In many cases, these consumers could be looking to purchase the vehicle via a conventional vehicle loan available at most banking institutions. However, in situations where the borrower currently has a poor credit score and/or low credit usage profile, the auto financing option from banks may not be possible due to the strict credit and lending parameters imposed by banks. In these cases, the bad credit auto loan can potentially be a viable option in Ontario with many such vendors available across Toronto, Mississauga and Hamilton.

What Defines Bad Credit?

One of the key elements of consumer finance is the concept of the credit score. When a consumer uses his or her credit card to make purchases, they begin building a credit history. Once repayment is complete, specialist organizations like Equifax and TransUnion (the two major credit bureaus in Canada) will compile this information and assign a credit score on a scale up to 900. A good credit score (650+ in Canada) is generally reflective of responsible spending and repayment patterns while a poor credit score (<500 in Canada) may mean that the consumer has failed to repay on time, gone through a bankruptcy, has a high amount of debt outstanding etc. It is for the consumers on this end of the spectrum that the bad credit auto loan is most useful.

What is Bad Credit Auto Financing?

In Ontario, there are several providers of auto loans for people with bad credit or low credit, available either through applications online or at select brick-and-mortar locations across Mississauga, Hamilton, Toronto, Brampton, etc. The process for poor credit car loans is somewhat different from conventional lenders or dealership loans.

With this type of loan, consumers can finance the auto vehicle they purchase over a certain time period at a fixed rate of interest. Whether a down payment is required or not is dependent on the individual lender. That said, however, most lenders will require a minimum level of income to gain comfort that the monthly repayments are achievable for the borrower. Once the loan is provided, monthly repayments are made just like a regular loan until the term ends.

Best Practices for Bad Credit Auto Loans

When making an auto purchase, there are several best practices to keep in mind before, during and after receiving the keys from the car dealer:

Assess Individual Needs
Looking at and making a vehicle purchase often requires weeks or months of planning. For consumers with bad credit, it is particularly vital that the car best matching their individual needs for capacity, mileage, economy, and other factors is chosen. A car that does not meet baseline needs is inconvenient while a car that overshoots needs can be expensive.
Create a Budget
First, identify the sources of income and anticipated expenditures over the loan term. Once that has been factored in, determine the residual amount remaining In this regard, it is also important to use an online auto loan calculator (available on most Canadian banks’ websites) to check what loan terms would be affordable.
Compare
Different lenders across Ontario will offer loans with varying terms. Therefore, it is critical to not stop at the first lender when making an auto purchase. For example, a lender in Toronto may offer a higher rate than one in another part of the province due to the higher rent and/or inventory holding costs they may face in running their business.
Read The Contract
This cannot be stressed enough! After receiving the loan terms, many borrowers assume that the lender has already provided all the information that they need. Before signing on the dotted line, however, details such as hidden fees, late payment penalties, service/administration costs etc. need to be evaluated to ensure a complete knowledge of the loan.
Make A Copy Of The Contract
Most lenders will provide the borrower with a copy of the signed contract for their own records. In case they don’t, as a borrower, it is your responsibility to ask for a copy.
Make Payments On Time
After receiving the loan, to avoid the credit score dropping further, borrowers are required to make all principal and interest payments on time. If there are extenuating circumstances that occur over the course of the loan term (such as a bankruptcy), the borrower must immediately make the lender aware, and appropriate procedures can then be followed.

Advantages of Bad Credit Auto Loans

While these loans are typically more expensive than regular lenders, they do offer certain advantages for a borrower with poor credit. Some of these include:

Quickly Approved

Loans made through these channels are approved quicker as there isn’t a hard credit check requirement. While conventional lenders require the borrower to come in and meet with loan officers, these loans can often be completed entirely online in a few hours. This makes it a convenient option for time-pressed consumers.

Improve Your Score

The bad credit car loan can actually help a borrower increase his/her credit score. By making regular payments on time, the borrower is setting themselves up for a better credit profile come reporting time when the credit agencies compile and analyze the information to assign a score.

Potentially Large Sums of Money

Depending on the borrower’s needs and capacity to pay, they can potentially access large sums of money to buy a car. It is pertinent to remember though that the larger the principal, the larger the interest as well.

Disadvantages of Bad Credit Car Financing

Despite these obvious advantages, the easy nature of these loans does come at a cost. While some of them are monetary, others are more from a consumer safety perspective

High Interest Rates

These loans are distributed at higher rates than other banking institutions because of the added risk they take in lending to borrowers with a low credit score. To compensate themselves for this risk, they charge a higher return which can help to mitigate losses from bankruptcy or delinquency from other borrowers.

Predatory Lenders

Customers of bad credit auto loans should also ensure that they have read contracts carefully before signing. While the regulatory landscape has tightened over the recent past, consumers can still be subject to bad practices by way of higher fees, information withholding etc.

Numerical Differences

To illustrate the difference from a financial perspective, below is a loan for the same type of car from a conventional banking provider and from a bad credit loan provider.

As can be seen from the example above, while the monthly amount rises by approximately $11, the total interest paid over the 5 years goes up to $1,142 from $488 – an increase of 134%! Therefore, it is important for buyers to budget appropriately before making such large commitments.

Key Variables

Before taking out a bad credit car loan, there are some important variables to keep in mind:

1. APR: The Annual Percentage Rate, which stipulates the annual percentage rate of interest that the borrower has to pay on loans is a key consideration from the example mentioned above.

2. Monthly Payments: The total monthly payment comprising principal and interest amounts is calculated from APR, principal amount and loan term (otherwise known as the duration that the borrower has taken the loan out for).

3. Loan Term: Longer loan terms mean smaller monthly payments, but this is offset by the fact that the amount of interest paid is greater over the total period of the loan.

4. Down-Payment: While this may not be as big a consideration in these types of loans (particularly if there is no requirement for a down payment), a down-payment serves to reduce the monthly repayment amount if the borrower has the financial capacity to be able to do so upfront.

5. Total Principal Amount: The total principal amount borrowed depends on the market price that the vehicle is sold at, as well as applicable fees and taxes. The greater this cumulative amount, the higher the monthly payment will be.

6. Penalties and Other Fees: Going back to contract reading best practices, it is important to gain an understanding of these fees to avoid any outsized financial penalties.

7. Trade-in: Some dealerships will allow a trade-in vehicle, which can be “traded in” for a new one. The old vehicle’s value is appraised, and is subtracted from the market price of the new car. It could therefore work to the borrower’s benefit to obtain a loan after trading in his/her old vehicle.