Canada is a huge country with an expansive road network, encompassing over 900,000 kilometers. This is one of the main reasons why most Canadians today own a car — it’s one of the easiest ways to get around the country.
Over 92 percent of light-duty vehicles account for the number of registered vehicles among Canadians. This just goes to show how important owning a car is to all of us. But there are an unfortunate few who might struggle to own a set of wheels of their own because they can’t get the car loan they need.
If you’re wondering how to secure a bad credit car loan, this blog is for you.
What Makes It Difficult To Get a Car Loan?
In an ideal world, we’d all qualify for the loans we need, no matter what our credit rating looked like. But the reality is that it just doesn’t work that way when it comes to traditional banks and other lending institutions. The bottom line is that there is always too much red tape to try and navigate.
But what makes qualifying for a car loan so difficult in today’s day and age? Let’s take a look at the two main reasons:
1. A Poor Credit Score
In Canada, credit ratings range from 300-850 points. The closer you are to a score of 300, the poorer your credit rating is. If your credit score sits somewhere in the middle, around 650 points, this works in your favor when it comes to loan approval.
Anything less than 600 points might make it difficult to qualify for any type of loan. The irony is that the average credit score among Canadians today is actually below subprime (650 points). So, you’re not alone if you’re struggling to get the auto loan you need for a new vehicle.
Traditional banks and lending institutions make it extra difficult for many people to qualify for a loan because they expect you to build good credit by making regular debt payments. But if you can’t qualify for a loan to make these types of payments, how do you build up a credit rating? It’s a real pickle.
Luckily, non-traditional lenders are willing to cut you a break, such as CarsFast. These types of lenders specialize in helping those with poor credit get the approval they need, according to their personal lifestyle and budget.
2. A Lower-than-Average Income
Aside from your credit score, banks and other lenders also take a look at your earnings and level of income. While you could still qualify for auto financing from a car dealership with poor credit, you might not qualify if you have lower-than-average earnings.
In Canada, the lowest income you can earn in order to qualify for a car loan is around $1,800, before deductions and taxes. However, some lenders are willing to work with what you earn if you have a steady income and solid employment.
How To Qualify for a Bad Credit Car Loan: What Does It Take?
It’s not all doom and gloom if you have a poor credit score. You can still qualify for a car loan, even if you’ve previously declared bankruptcy. But, your loan won’t come from a traditional bank or credit union. Most of the time, you’ll qualify with a non-traditional lender, as mentioned.
A bad credit auto loan works much the same way as a traditional car loan. You make set payments over a period of time (term) on the loan, plus interest.
However, there is one key difference — the interest rate. With a traditional bank or credit union, you’ll usually receive a lower interest rate on the loan you qualify for. But with a non-traditional lender, you’ll most likely pay a higher interest rate, which means that most of your monthly payments go towards paying off interest.
Here’s how the approval process works for a bad credit car loan:
1. Make Your Downpayment
Ideally, you want to make a decent downpayment for a bad credit car loan. In other words, you need to be as financially prepared as possible. A good downpayment means that you need to submit more than just the minimum requirement — several thousand dollars, if possible.
Why is this important? Because the more you can pay upfront for a bad credit auto loan, the less you’ll have to pay in monthly installments and interest over time. The bigger your downpayment, the more appealing you are to lenders as well.
2. Submit Financial Statements
Just like traditional banks and credit unions, a non-traditional lender will also need to ensure that you’re able to afford your car loan, i.e. you can meet those monthly installments. In order to prove this, they’ll need to review your financials.
You’ll have to submit financial paperwork in the form of banking statements or proof of investments to show you have a reliable income. They might also want to review any debt you already have.
3. Submit Employment History
Along with reviewing your financial status, your lender will also take a look into your employment history. It goes without saying that steady employment makes you a desirable candidate for any type of loan.
You’ll need to submit pay stubs, and proof of employment such as a work contract or written letter from your employer.
4. Choose Your Vehicle
Once you’ve submitted all of the above, it comes down to choosing the right type of vehicle. When it comes to bad credit car loans, the more inexpensive the car you choose, the better. This is important because the smaller the principal amount, the quicker you can pay off the loan, and you’ll pay less interest over time.
You also want to keep your monthly repayments relative to your income. All of this makes you a desirable candidate for this type of loan, boosting your chances of approval.
Top Tips To Help You Qualify for a Bad Credit Car Loan
Non-traditional lenders still have a list of specific prerequisites they need to check off when choosing a loan candidate. This means that they don’t just dish out loans to anybody and everybody.
Here are a few tips that could help you secure that loan approval and get back on the open road:
1. Keep a Low Profile
In the lead-up to your car loan application, you must avoid accumulating any more bad credit items. Keep a low profile and keep your credit in check. Pay your debts and overheads in time, specifically your rent payments, and credit card charges.
Your lender will scope out your financial status to assess whether you’re the right candidate for a loan. Paint the best financial picture to improve your chances of approval.
2. Have an Idea of Average Interest Rates
As mentioned earlier, the interest rate on a bad credit loan is a little higher than the average. You might already have this knowledge before you submit your application, but it’s important to know when you’re being ripped off, too.
Do some homework on the average interest rates for regular auto loans, and then what you can expect for a bad credit auto loan. If the interest rate you’re offered is double the average, be skeptical about it.
3. Don’t Overestimate What You Can Afford
It’s a common pitfall among many people who apply for bad credit car loans. Don’t fall into the trap of thinking you can afford more than your monthly income can support because you want a nicer car.
It’s easier said than done, but try to keep a realistic budget front of mind when choosing your vehicle and a loan repayment plan.
4. Skip All the Extra Features
The fancy, extra features on a car bump up its price. But the reality is that in order to get the loan approval you want, you might need to sacrifice all of these extra features. Do you really need a sunroof and top-notch speaker system?
Depending on your credit score and what you can qualify for, you’ll need to look fast fancy features, and stick to what’s practical and realistic.
5. Consider a Cosigner
Adding a cosigner to your loan agreement is a great way to bump up your chances of loan approval. A cosigner is someone trustworthy and reliable that will take on a share of responsibility for your loan. This might include a family member, a spouse, or a long-term friend.
Loan assessment is all about weighing up risks for any type of lender. The less risk involved, the more likely you’ll get the approval you need. But bear in mind that a cosigner is not always a fool-proof or necessary option for everyone, i.e. you don’t always need one.
Get the Car Loan You Need in Three Simple Steps
If you feel completely shut out of the car lending market and at a loss due to a poor credit rating, there are legitimate ways to secure the loan and transportation you need.
Qualify for a bad credit car loan with CarsFast and our impressive auto lenders network. All it takes is three simple steps: apply online, receive approval, and shop for your vehicle.
Apply here to secure the wheels you deserve.