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A person is shown doing paperwork for bad credit car loans at a car dealership.

Securing a Loan with Poor Credit in Canada

Buying a car is not easy, especially if you have bad credit. With car prices on the rise and the supply chain growing increasingly thin, purchasing a car has become more stressful than ever before. Luckily, here in Canada, there is a solution to the problem of auto financing with poor credit: bad credit car loans.

What is a Bad Credit Car Loan? Essentially, a bad credit car loan helps you purchase the vehicle of your choice despite perceived financial weakness. Anyone with a lower credit score, say 600 and below, will normally have difficulty securing credit owing to their history of having trouble paying off existing debts. With a bad credit car loan, you need not worry about your previous credit history. You are still eligible for automotive financing despite your poor credit history. Today, we’re going to go over what a bad credit car loan is, how they work, where you can get one, and some things you need in order to qualify for your loan.

What Is a Bad Credit Car Loan?

As we mentioned, a bad credit car loan is a loan designed for someone with a poor credit score. How loans work, essentially, is that you borrow an amount of money from, say, a dealership or a bank and use that money to purchase your vehicle. The dealership or bank then holds onto the title of your vehicle until you’ve paid your loan amount in full, plus interest.

For someone with poor credit, often as a result of failure to pay off debts in a timely fashion, it can be tricky to get financing for a new car. However, some lenders understand the need for the average Canadian to be able to drive their own vehicle and specialize in lending to people with low credit.

Still, as someone with bad credit, you are looked upon as a risk to the lender, especially where large sums of money are involved. There is hope, through the bad credit car loan, that you will be able to drive off the lot with a new vehicle despite having a poor credit history. Here’s how that works.

A car salesman is shown negotiating with a customer.

Applying for a Bad Credit Car Loan

Applying for a bad credit car loan is the same process as applying for a regular car loan, only the requirements are usually far less strict. You still present a risk to the lender, which is why you’ll want to be prepared for the unlikely, but possible scenario of being turned down.

Don’t let this discourage you, however. When applying for a bad credit car loan, you may potentially be looking at a smaller loan amount. Businesses that operate as bad credit lenders, such as some automotive dealerships, are often not able to provide a sizable loan owing to your creditworthiness. This essentially means that whatever loan you may be approved for might not cover the entire cost of your vehicle.

Then there is also the downpayment to take into consideration. While some bad credit car loans do not require any form of downpayment, some require it. The downpayment can be as much as 20% of the price of the vehicle. With car prices these days, that can be an enormous amount. The reason behind mandating a downpayment is that, as you have poor credit, you’re more likely to default on your loan. Businesses need to survive, and in order to do so, they need cash to operate. Despite the good-natured intentions of bad credit car loans, they can often leave you in a pickle.

Finally, you need to factor in the length of the loan, which will dictate the monthly payment amount and the interest rate. Interest rates can be fixed or variable depending on your lender, and owing to the risk involved in taking on borrowers with poor credit, the rate is often going to be much higher so the lender can see some kind of return. Many bad credit car loans run for a term of 48 months, though some have been known to stretch farther. You’ll likely be faced with a short-term loan as the lender will want its money back from you as soon as possible.

Bad Credit Lender Options

So who can you turn to for a loan? Well, there are a number of options. First off, there are banks and credit unions. These will likely be the most difficult places to find a Bad Credit Car Loan. Vehicle financing can be difficult, especially owing to the price tag and collateral involved, mainly the car in question. However, there is the option to get a larger, personal loan with which you can potentially cover at least the down payment. While there are several financing options available via banks and credit unions, they often turn those with poor credit down as they pose a much greater risk to the institution. Still, if you are approved for a loan, you are likely to get good terms at a bank or credit union.

Another option is a buy here pay here (BHPH) dealership. Many dealerships have their own in-house financing teams that cover loans. The benefit of borrowing through a BHPH dealership is that you borrow and pay them directly instead of bringing in a bank or other third-party lender. The downside is that often the loans will be smaller, there can be extra fees and taxes involved, and there are often higher interest rates. Still, dealerships often offer a bevy of incentives, such as discounts and available warranties, to better their chances of your business. Despite you being a risk, dealerships still need to keep vehicles coming in and going out.

Finally, there are alternative lenders such as auto brokers and independent financing companies specializing in bad credit loans. It can be easy to get a loan with these lenders as it is their main business. However, be wary. You can often be subject to higher interest rates and potential bad loans as these companies are more difficult to regulate than your normal avenues of lending. So, if you’re looking into working with an independent lender, be sure to research them as thoroughly as possible and determine if the company is reputable before deciding to borrow from them.

Keys are shown exchanging hands at a dealer.

Qualifying for a Bad Credit Car Loan

Now that we’ve looked at the benefits and costs of looking for a bad credit car loan, let’s go over exactly what you will need in order to qualify for one. Firstly, you’ll need a clean driver’s history. You’ll need to be the requisite age for your province or territory. Pay down as much of your already existing debt as possible. The better you become about paying down your current debt will help improve your credit score and leave you with less debt to pay off when your auto loan is approved.

Ensure you do proper research on lenders and loan options, as we’ve said. See if someone will cosign your loan with you. The lender will look into your cosigner’s credit history, and if your cosigner has good credit, your chances of securing a loan increase dramatically. Finally, you’ll want to ensure you have a steady job with a documented income. Unemployment and lack of income can be the nail in the coffin as far as securing a loan goes.

Experience the Joys of Driving

There’s your basic guide to Canadian Bad Credit Car Loans. It’s not a simple process by any stretch of the imagination, but having the ability to purchase a car despite poor credit history means that more people than ever will be able to experience the joys of driving without having to pay ridiculously large amounts of money upfront in order to secure a safe, reliable vehicle. Ensure that you do proper research before deciding on a loan and check with your local dealerships to see what they can offer you before heading to the bank.