Most of us don’t have 20 or 30 grand in the bank; a third of us have less than $10,000. With the average car costing more than three times that, many Canadians are forced to finance our vehicles. But securing that financing can be difficult if you have average or below average credit.
Let us make getting that bad credit car loan a little easier.
Factors That Affect Your Credit Score
Sometimes poor credit scores arise from a misunderstanding of what goes into building one. As you can see from the chart below, it’s about so much more than whether or not you pay your bills on time.
What Your Low Credit Score Tells Banks
A credit score below 620 lets lenders know that you haven’t always borrowed responsibly. Maybe a divorce drove you into bankruptcy, or you ended up defaulting on a loan after a job loss. Whatever caused your credit problems, know that you’re not alone. FICO concluded that approximately 21-percent of borrowers had subprime credit in 2016.
Regardless of why your score tanked, lenders will see you as a liability. Therefore, you’ll either end up paying higher interest rates or struggle to get approved at all. That’s why you should try and fix your credit first.
What Steps Can You Take to Repair Your Bad Credit?
Unfortunately, there’s no easy way to get your credit score out of the gutter. The amount of time it takes varies depending on what drove you there in the first place. While some things can be fixed in a month or two, such as a reporting error, others can take years to fall off. Bankruptcies, for example, can leave their mark on your credit up to six years after discharge.
Fortunately, you can these steps to stabilize it:
- Pay Off Anything That’s Sitting in Collections
- Consolidate All Your Debt into One Loan
- Avoid Making Any Additional Credit Card Purchases
Where Can You Go for a Bad Credit Car Loan?
First off, avoid those ‘buy-here, pay-here’ dealers like the plague. These dealers not only charge astronomical interest rates but usually stipulate that bills be paid in person.
John Oliver explored their predatory practices in this thought-provoking piece.
If buy-here, pay-here lenders are out, what next? First, you should reach out to any banks or credit lenders you have established a relationship with. They’ll be more likely to cut you a favorable deal. If those don’t pan out, find three to four other lenders with above-average reviews. You can also consider going with a charitable organization or non-profit.
Heck, you can even give us a try.
Just make sure you finish all those bad credit car loan applications within a fortnight. Having too many hard credit inquiries in too long of a time period can further bruise your credit.
5 Things You Need to Do to Get a Bad Credit Car Loan
There are a few things you can do to make securing a bad credit car loan a little bit easier. These are:
- Be Realistic About What You Can Afford: While you might really like that Jeep Gladiator, it might be a bit outside your budget. Go used instead of new. Buy instead of lease. It’s also important that you keep the bad credit car loan term as short as humanly possible. As a rule of thumb, try to keep your car payment to less than 10-percent of your monthly income.
- Come with a Healthy Down Payment: To mitigate the risk of low credit, many banks require a sizable down payment. The higher you can make it, the better. If you have a car to trade-in, that helps too. As this reduces the principal of the loan, putting in money up front will save you trouble in the long-run.
- Make Sure Your Credit Reports Are Error-Free: Acquire a copy of your credit report from a site like Credit Karma or an official bureau like Transunion or Equifax. Once you have it in front of you, scan it carefully. If you find any errors, reach out and dispute them with the applicable agency. This can help improve your credit standing.
- Bring Your Pre-Approvals with You: Some dealers prey on those with bad credit. To stop yourself from becoming their victim, you’ll need to come armed with a pre-approval. This will force the dealership to start their negotiations from a more favorable position.
- See If You Can Find a Cosigner: A cosigner is someone who agrees to make your bad credit car loan payments if you don’t hold up your side of the bargain. Having one makes loans easier to get. But it can also lead you bad blood and hard feelings. If you’re not confident in your ability to keep the car, don’t rope in a cosigner.
What Should You Do If You’re Declined?
If a lender turns you down, don’t take it as an insult. They’re just trying to keep you out of financial trouble. And, since they’re required to tell you why you were denied, that action can give you some valuable insight into what’s going on. If it’s because of something on your credit report, the law also mandates that they give you a copy. This can save you from having to pay for one yourself.
Don’t let that denial stop you from trying! Just find a different bank and try again. If you find yourself at a dead end, take a break and save up for a bigger down payment. Or, if you need a car right away, see if you can find someone willing to cosign or co-borrow for you.
Is There Anything Else You Should Do?
You’ve picked a car, secured financing, and are getting ready to handle the paperwork. Unfortunately, there’s more to it than that.
When you buy a car from a dealer, they’ll typically take care of the title and registration. But, before they hand you those keys, you’ll have to provide them with proof of income and proof of insurance.
Just don’t be surprised if your poor credit leaves you paying a premium on the latter too.
When Should You Refinance Your Bad Credit Car Loan?
After about a year of making consistent payments, you might want to consider refinancing. And, not only because your credit score may have gone up. That money you’ve been throwing at the bank also improved your loan-to-value ratio and lowered your overall balance. This will result in a better interest rate and, in some cases, a lower monthly payment.
What Do I Do If I Can’t Make a Car Payment?
It’s important that you face the problem before you’re too deep to climb your way back out. If you are struggling to make payments, you need to start by reaching out to your lender. Most banks are eager to help you avoid defaulting. Without you, they don’t make any money.
If the things that affected your ability to pay are short term, most lenders will defer your payments for a couple of months. While interest will continue to accrue, you’ll be freed from the burden of making a monthly payment. If you can scrounge some money together, you should still throw some money at that accruing interest.
For longer-term issues like a job loss or disability, lenders may offer to restructure the loan to better align it with your needs. This often means extending your loan term or lowering your interest rate. If these things won’t help, it might be time to sell your vehicle.