Quick Links

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 with many such vendors available across Canada.

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 Canada, 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. 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:

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:

Disadvantages of Bad Credit Car Financing

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

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.

Conventional Loan

Principle: $5,000
Down-payment: $1,000
APR: 3%
Loan Term: 5 years
Monthly Payment: $85.64
Interest Paid: $488.21

Bad Credit Car Loan

Principle: $5,000
Down-payment: $1,000
APR: 9%
Loan Term: 5 years
Monthly Payment: $96.53
Interest Paid: $1,141.58

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.

Things to Consider when Applying for a Bad Credit Car Loan?

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.

Bad Credit Car Loans FAQs

How can I get a car loan with bad credit in Canada?

Getting a car loan with bad credit in Canada is possible thanks to poor credit auto financing. Not every lender will be able to help you if you have a poor credit score, but there is still a good range of options to choose from. Bad credit auto lenders have experience with consumers with bad credit; typically their terms rely on higher interest rates, collateral against the loan, or a large down payment. Some lenders will look at your income level rather than your credit score, while others may be able to approve you if you have a cosigner.

What credit score do you need to get a car loan?

One of the most important factors in approval for a car loan is your credit score; most Canadian lenders have a minimum credit score threshold of 550 for their car loans. However, borrowers with a score lower than this can still find approval for a car loan, often through a bad credit auto loan. Bad credit auto financing is geared towards those with a poor credit rating, and typically relies more heavily on income level and loan terms than on credit score. For example, borrowers may have to pay a higher interest rate, or put down a larger down payment, to gain approval for the loan.

Can I get a car loan with a credit score of 500?

A credit score of 500 may make finding auto financing difficult, but you may still be able to get a bad credit car loan. Your chances are better if: you save a large down payment; you can find someone with a good credit score to be your cosigner; you are able to provide collateral.

How much do you have to put down on a car if you have bad credit?

There are plenty of options out there for car loans for people with bad credit, and some of these rely on the borrower having a sizeable car loan down payment. Typically, a down payment of 20% or more can help improve your chances of loan approval, even with bad credit. However, not every bad credit loan relies on this; some lenders will still approve bad credit borrowers even with zero money down. These lenders may ask for some form of collateral, or, depending on the size and term of the loan, they may charge a higher interest rate.

What is the average interest rate for a car loan with bad credit?

Bad credit car loan interest rates can vary widely, but the average rate for Canadians is 7-20%, with the higher end of that spectrum applying to those with worse credit scores. However the terms of the loan can greatly affect the interest rate; for example, the longer the loan term, the higher the rate.

How do I choose the best auto loan for bad credit?

Poor credit auto loans are widely available, but borrowers need to be wary of the differences in terms between lenders. Some lenders charge very high interest rates that will make your loan unaffordable. Smarter Loans has sorted the wheat from the chaff, and created a directory of reputable and reasonable auto loan options for bad credit borrowers. Use the list above as your guide to bad credit auto financing. And if you’re still stuck, consider pre-applying, so we can match you with the best fit for your needs and get you pre-approved for a car loan with bad credit.

Applying for a car loan online

Completing an online car loan application for bad credit has never been easier or more secure, and it makes finding approval for a loan as accessible as possible. Given that bad credit borrowers generally find it harder to secure approval for loans and need to research and apply to multiple lenders, applying online saves valuable time and energy.