How to Qualify for Car Financing with Bad Credit in Canada

Let’s start by stating the obvious: your credit history is important. Maybe you didn’t know that then, but you know it now.

Whether you’re seeking a loan, buying a car, or applying for a mortgage, your credit score traditionally decides whether you get approved or declined at crucial moments in your life. But if your credit score is bad now, don’t worry, you can improve it. And in the meantime, you can still get approved for a car loan with bad credit.

You just need to know where to look….

Two main reasons why people with bad credit struggle to get approved

1. Your credit score

Credit scores in Canada range from 300 points to 900 points. According to Equifax, one of Canada’s major credit bureaus, a good credit score of 660 will likely qualify you for a loan. However, any score of less than 660 might make it challenging to get approved for new credit.

Considering the average credit score in Canada is on the brink of subprime (a score below 660), applying for credit can be a frustrating process for a lot of people.

Repairing your credit might seem next to impossible when your credit is poor. You see, one of the best ways to rebuild credit is by making regular payments on a loan to show lenders you are reliable. But here’s the kicker: you find it difficult to get approved for a loan because you don’t have good credit. It’s what you call a conundrum.

Having a great credit score means you can simply waltz into a bank or dealership and get approved for an auto loan without any fuss. However, for a Canadian with low or no credit history, it gets a bit trickier.

When the banks say “no”, there are easier ways to get car finance. There are lenders who specialize in helping customers with bad credit, and they can help you get approved for a vehicle that fits your budget and lifestyle. With a bad credit auto loan, a customer not only gets into the driver’s seat of a new car but also gets an opportunity to rebuild their credit history.

2. Your income

If you have bad credit, you can still get approved for an auto loan if you go through a dealership or provider that knows how to help. Some lenders will look at other factors besides your credit score, like your income. Typically, the minimum income for a person to qualify for an auto loan with low credit is $1,800 every month before taxes or deductions (i.e. CPP, EI, etc.).

To put your income requirements into perspective, here’s the breakdown:

Meeting the minimum income requirements isn’t necessarily make-or-break when it comes to qualifying for car financing. In fact, some lenders will even work with customers who earn their income from government programs. But if you have steady employment, that’s half the battle.

How to get a car loan with bad credit

Here are a few tips that could help you secure approval for car finance with poor credit.

Total Time:

• 120 Minutes (Including Test Drive)

What you’ll need:

• Proof of Employment
• Bank Statements
• Mobile Phone
• Drivers License

Understand your budget

If you want to find vehicle options that fit your budget, you should form an idea of how much you can afford every month. This car loan calculator will give you a rough estimate of what to expect. If you want to trade-in your current vehicle for something newer, your trade-in vehicle will lower your monthly payment, so make sure you factor that in. You can find out more about your vehicle’s trade-in value here.

Consider a used vehicle

If you want to get approved finance on a great deal, look in the used car market. It’s extremely robust in Canada, so whether you want a truck, SUV, or passenger car, you’re bound to find what you’re looking for there. You’ll get almost all the benefits of a new car but at a lower purchase price. Also, depreciation isn’t as big of a concern when you’re driving off the lot.

Get pre-approved online

It’s hard to know where to look when you have a low credit score, and there’s no point wasting time looking at vehicles you can’t afford. But while some dealerships and lenders are not equipped to help bad credit customers, online providers like AutoWinnipeg can pre-approve you for the amount you need and connect you with local dealerships that know how to help.

Decide on a down payment

Decide whether or not you want to make a down payment and how much your down payment should be. The down payment is a percentage of the purchase price paid upfront. With a down payment, your chances of approval are even higher. But a down payment isn’t possible for everyone, and there are also no money down options you can explore. AutoWinnipeg can help you find the option that’s right for you.

Decide on a cosigner

Do you have a cosigner ready or will you be the only name on your car loan application? A cosigner is a trusted friend or family member who agrees to share responsibility for your loan. A cosigner can boost your chances of approval because he/she decreases the level of risk for the lender. However, like a down payment, a cosigner isn’t a viable option for everyone and you can still get approved without one.

How does a car loan help improve bad credit?

If you don’t know where your finances stand before applying for auto financing, it’s best to do some digging to figure out where your credit score lands. You can download your credit report and learn your credit score for free at sites like Borrowell. If your score is poor or fair, you might want to look at ways to improve it. With a few small adjustments, you could see your credit score increase in as soon as 30 days. Your car loan can help you build credit.

Monthly instalments on a car loan can help you improve your credit score for more reasons than one:

1. Payment history: Reliably making car payments on time will help improve your credit score. This is because your payment history contributes to 35% of your credit score. Good payment history tells lenders if you are a reliable borrower that will pay them back.
2. Credit utilization: makes up another 30% of your credit score. If you get cashback with your car loan, you can use that money to pay down other high interest debt, like a credit card. If you bring your balances down to below 20% – 30% utilization, you will get another boost to your score.