Many car dealerships advertise financing for buyers with bad credit or no credit at all. It is possible for those with less-than-ideal credit to get a car loan, but due diligence is required to ensure that the terms of the loan are affordable. These steps can help consumers with low credit scores find car loans that won’t break the bank.
1. Know the Score
The first step for potential car buyers who suspect they have poor credit is to find out exactly how low their scores really are. Consumers can access their credit reports and scores from both Equifax Canada and TransUnion Canada, the country’s two credit bureaus. In general, a score of 650 or above is considered a good credit risk in Canada, while below that number puts buyers in the subprime category. This often means higher interest rates.
2. Save a Down Payment
In many cases, buyers can get a lower interest rate even with bad credit by putting money down on the car. A 10% down payment is often enough to access more favorable terms. That means buyers interested in financing a $10,000 vehicle should expect to put down at least $1,000, especially if they have a credit score below 650.
3. Consider a Cosigner
Those who have a trusted family member or friend who has good credit and is willing to cosign on a car loan may be able to afford a better financing package. However, this person must undergo a credit check and agree to serve as a guarantor should the loan not be repaid.
4. Shop Around
Subprime buyers can often pay 9 to 10 percent interest on an auto loan, compared to just 3 to 4 percent for those with better credit scores. Buyers should know these numbers when they apply for financing. Car loans with higher than 10 percent interest aren’t worth the cost, so it makes sense for shoppers to get a few different offers before committing to financing.
5. Do the Math
In addition to getting educated on expected interest rates before shopping, buyers should be aware of what they can afford and stick to that price range. That means calculating the target purchase price based on the total amount you’ll expect to pay, not the monthly payment you can afford. Shopping by monthly payment often means agreeing to longer loan terms, which isn’t usually a good financial strategy when it comes to car shopping.
6. Provide Documentation
The best way to get a favorable car loan despite a poor credit score is by establishing good faith in other ways. When shopping for a loan, consumers should bring copies of recent pay stubs, utility bills, and other documents that prove their ability to generate income and pay back debts.
Though car loans for poor credit are common, a low score doesn’t mean settling for the first offer. Preparation and research can potentially help consumers qualify for more favorable interest rates and shorter terms, saving them thousands over the life of the financing contract.