Bad Credit and Looking for a Car Loan?
So you’ve got bad credit, and you assume that with your credit score, getting a vehicle just isn’t possible. Well, we’re here to tell you that it is entirely possible, and a great way to get your credit on the right track. As a matter of fact, getting a car loan is one of the best ways to improve your credit score. We work with dealerships across the country that work with Canadians every day in getting them in a car they love at a rate they can afford. In this article, we’re going to cover how getting a car loan can improve your credit, 3 steps you need to take to get a car loan with bad credit, why monthly payments are more important than the total amount of the vehicle and why you should buy a used car instead of a new car.
How a Car Loan Can Improve Bad Credit
Getting a car loan is one of the best ways to improve your credit score and show lenders that you’re a dependable loaner. If you consistently make your payments in full and on time your proving to the lender that you’re a responsible borrower. Making your payments on time accounts for 35% of your credit score! That 35% will make or break your credit score and impact your ability to receive financing for a vehicle or any other future loans. Your credit score is also based on your credit history, so it’s important your up to date on all outstanding debts before getting a car loan. Your credit score is a number between 300 and 900, this number represents the level of risk you are as a borrower to any potential lenders. The lower the number, the higher the risk lenders will see you as, increasing your interest rates and decreasing the likelihood of approval. The higher the number, the more likely you are to get approved at a favorable interest rate. What are you waiting for? Apply today!
Three Reasons to Build Credit Through a Car Loan
- It’s easy to get approved for a car loan: Millions of Canadians have bad credit yet are still approved for car loans. These Canadians usually qualify for what is known as a “non-prime” loan. All a non-prime loan means is it’s a loan for someone with a below-average credit score. Typically, any credit score under 670 would be considered to be non-prime.
- Auto loans are secured loans: A secured loan just means the loan is backed by collateral. In the case of an auto loan, the vehicle would be used as collateral. This makes lenders much more comfortable as if the borrower fails to keep up with their payments, they’re able to repossess the vehicle, causing them less financial loss. Due to the lessened risk of financial loss to the lender, typically the interest rate on a secured loan will be less than an unsecured loan.
- To build credit, you need credit history: The only way to improve your credit score is to use credit, and use it responsibly. It's important your up to date in all your outstanding debt. Once you’ve had the car loan open for a year, as long as you’ve consistently made payments on time, you’ll likely be able to refinance your loan at an even better rate.
Three Steps to Getting a Car Loan With Bad Credit
- Know what you can afford: It’s important to be 100% certain that you can afford the vehicle you’re looking to buy. Budget how much you make per month and factor that into how much your monthly car payments will be. A good rule of thumb is to keep your monthly payments under 18% of your monthly income. Use our car loan calculator to give yourself a better idea of how much you can afford. Once you've budgeted what you can afford, you can get pre-approved for a car loan!
- Make a down payment: Making a down payment is a great way to both lessen your monthly payments and increase the lender’s confidence in your ability to repay the loan. Putting a down payment shows the lender that you're willing to put skin in the game. Skipping on a down-payment may seem tempting, but it will hurt you in the long run. Not only will you be at an increased interest rate, but your monthly payments will be higher.
- Find a cosigner: If you’re having trouble being approved for a car loan, consider reaching out to a friend or family member to act as a cosigner. Having a cosigner instills much more confidence in the loan, as there are two names associated with it.
Focus on the monthly payments, not the total price
We know that whether the car you’re buying has a $20,000 price tag or a $25,000 price tag, it can be intimidating signing a financing agreement with a price tag that high. But it’s important you don’t look at it that way, and instead, you break it down into what it will cost you month by month. Different vehicles qualify for different terms, so even though a car has a more expensive price tag, it may cost less in monthly payments. Older vehicles don't usually qualify for long term loans so even if the older vehicle is cheaper, it may cost you more monthly. The shorter your term length the better but if you need to sign a loan on an eight-year term length to make your monthly payments affordable, that’s ok! At the end of the day, your monthly payment is what comes out of your bank account. So long as you can maintain making those monthly payments on time, your credit score will inevitably increase and you’ll own a reliable vehicle.
Buy a Used Car Instead of a New Car
There are many reasons you should consider buying a used car over a new car, we’re going to break down the top five reasons below:
Buying used saves you money: Used car prices are significantly cheaper than what you would be paying for a new car, as the used car has already depreciated. This means your monthly payments will be lowered and you won’t watch your car depreciate in the first month of its ownership. New vehicles depreciate by 30% after one year of being on the road! That’s a huge chunk of money you could save if you buy used, it’s a no brainer.
No extra fees for upgrades: When you buy a used car, you get the car as it is. If the car has an upgraded stereo system, heated seats, and a custom grill, you won’t be paying for these upgrades. This is a great way to enjoy the luxuries of car customization without the high costs of car customization!
More vehicle options when buying used: Every year, car companies make new models of cars and new versions of models. Often, the production of certain models ends even if they were great vehicles. When you buy used you’re not limiting yourself to a certain year’s model, you can look as far back as 8-10 years if the car is made well enough. This will allow you to get a car that fits your needs specifically and most importantly, fits your budget.
You can research the long term performance of the car: When car companies release a brand new model, nobody can say for sure it doesn’t have major flaws that will show after a year of driving. When you buy used, you have so many resources to look into the reliability of that vehicle over years and years of driving. This way you can be comfortable in knowing you’re not buying a car that is constantly in and out of the mechanic shop.
Used cars are thoroughly checked: Each car is thoroughly inspected before it’s sold. This gives you the confidence that your car isn’t going to need repairs a month after you drive it off of the lot. Also, many used vehicles may still be under their original warranty. Even if the vehicle’s original warranty has expired, with the money you saved buying used, it may make sense to put some of that money towards a warranty.
Are you ready to buy a car?
If you’re ready to shop for the car of your dreams, let Car Loans Canada help makes the process easy. We have plenty of resources on our site like the rates page where you have access to see the lender’s rates. Once you’ve seen the rates page, you can check out our car loan calculator and plug in numbers to give yourself a rough estimate of the costs per month of owning a vehicle.