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 lenders in Canada. Take a look below and click “apply now” next to a company of your choice to start an online application for an auto loan. You can also “pre-apply” for a fast bad credit car financing here, and we will connect you with the most suitable provider.

You can pre-apply for a bad credit auto loan 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

Interest Rate
$7,500 - $55,000
2.95% - 29.95%
12 - 96 months
Up to $50,000
$10,000 - $75,000
12 - 96 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 poor 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 all loan payments are 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.

If you are looking for additional information on auto financing shopping, please check out this helpful guide from the Government of Canada. 

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 car 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. Online lenders like these make it a convenient option for time-pressed consumers.

Improve Your Score

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. Online lenders like these make it a convenient option for time-pressed consumers.

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 do 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.

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

Car Loans in Canada

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:

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.

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).

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.

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.

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.

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.

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.

Pre-Apply For A Bad Credit Car Loan Here

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Tips for Improving Your Chances of Approval

Securing bad credit car loans can be challenging, but it’s not impossible. By taking a few strategic steps, you can improve your chances of approval and secure the car loan you need. In this section, we’ll provide you with valuable tips on how to boost your odds of getting approved for a bad credit car loan.

Review Your Credit Report

Before you apply for bad credit car loans, it’s essential to know where you stand in terms of credit history. Obtain a copy of your credit report and check for any inaccuracies or mistakes. If you find any, report them to the credit bureau and have them corrected. A clean and accurate credit report can increase your chances of securing a bad credit car loan.

Save for a Larger Down Payment

One way to reduce the loan amount and show your commitment to the lender is by providing a larger down payment. This can help lower the car loan interest rate and increase your chances of approval for bad credit car loans. A larger down payment may also reduce the overall cost of your loan.

Pay Down Existing Debt

Reducing your current debt levels can improve your credit rating and enhance your chances of securing a bad credit car loan. By lowering your debt-to-income ratio, you demonstrate to lenders that you’re capable of managing your finances responsibly, making them more likely to approve your car loan application.

Increase Your Monthly Income

Lenders evaluate your ability to repay the car loan based on your monthly income. By increasing your income, you’ll be seen as a lower risk to lenders. This can be achieved through part-time jobs, freelance work, or any other additional sources of income.

Consider a Co-Signer with Good Credit

A co-signer with good credit can significantly improve your chances of getting approved for a bad credit car loan. The co-signer takes on the responsibility of repaying the car loan if you fail to do so, which provides the lender with added security.

Shop Around for the Best Interest Rate

Don’t settle for the first loan offer you receive. Take the time to compare various car loans from different lenders to find the most competitive interest rate for bad credit car loans. Credit unions, in particular, are known for offering lower interest rates on bad credit car loans compared to traditional banks.

Get Pre-Approved

Getting pre-approved for a car loan before shopping for a new car demonstrates to dealers that you’re a serious buyer. It also provides you with a clearer understanding of your budget and the loan terms available to you, making the car-buying process smoother and more efficient.

Improve Your Credit Score

While it may take time, working on improving your credit scores can significantly boost your chances of securing a traditional car loan in the future. Pay your bills on time, reduce your overall debt, and maintain a low credit utilization ratio to gradually improve your credit rating.

The Role of Co-Signers in Bad Credit Car Loans

Applying for bad credit car loans can be a daunting task, especially when you’re faced with a low credit score and limited financing options. In such situations, having a co-signer can be a game-changer. This section will discuss the role of co-signers in bad credit car loans and how they can help improve your chances of approval, making your car shopping experience smoother and more successful.

Co-Signers as Credit Boosters

A co-signer with a better credit score and strong credit history can significantly increase your chances of securing financing for a new or used car if you have a bad credit score. Their good credit helps compensate for your bad credit scores, providing online lenders and credit unions with the assurance that the loan amount will be repaid on time.

Reducing Interest Rates

One of the major benefits of having a co-signer is the potential reduction in the interest rate on credit car loans. A co-signer with a strong credit score may help you secure financing at a lower interest rate, which can ultimately reduce the total interest paid over the life of the loan. This is especially helpful for those looking to buy a car with a bad credit score.

Expanding Your Financing Options

With a co-signer on board, you may have access to a broader range of financing options for new and used cars. A traditional bank, credit union, and online lender that may not have initially offered bad credit loans to individuals with a bad credit scores could be more inclined to approve your application when a co-signer is involved.

Private Sale Financing

Having a co-signer can also open up opportunities for private sale financing, which allows you to purchase a car directly from a private seller. This option can be particularly useful when car shopping if you find a great deal on a vehicle that isn’t available at a dealership and you find yourself in a situation where you have a bad credit score.

Co-Signers and Consumer Proposals

If you’re in the midst of a consumer proposal, it can be challenging to get a car loan. However, a co-signer can increase the likelihood of approval by assuring lenders that the car payments will be made on time, despite your current credit card debt or financial situation.

Enhancing Trade-In Options

A co-signer may also help you secure better trade-in options when purchasing a new car. With their support, you could potentially receive a higher value for your current vehicle, which can be applied towards the down payment, reducing the loan amount needed for your new car.

It’s essential to remember that co-signers are taking on a significant responsibility when they agree to support your bad credit car loans. They will be held accountable for the loan if you fail to make the car payments. Therefore, it’s crucial to maintain open communication with your co-signer and ensure you’re both comfortable with the arrangement.

A co-signer plays a vital role in helping individuals with bad credit scores or a low credit score secure financing for their new or used car. By partnering with a reliable co-signer, you can improve your chances of approval, reduce interest rates, and expand your car shopping options, making your dream of owning a car a reality.

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.

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