How to Qualify for Car Financing with Bad Credit in Canada
Canadians with bad credit (or no credit) often have a more difficult time getting approved for car loans. But it doesn’t have to be that way! When it comes to bad credit car loans, new opportunities are on the horizon. There are lenders and car dealerships that specialize in helping bad credit customers find affordable car finance. We reveal how you can get a car loan with bad credit; it’s easier than you think!
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:
|Hourly Income:||At least $10.50 per hour for 40 hours per week, or equivalent|
|Weekly Income:||At least $420 per week (before deductions)|
|Bi-weekly Income:||At least $845 every two weeks (before deductions)|
|Twice per month:||At least $900 twice per month (before deductions)|
|Monthly Income:||At least $1800 per month (before deductions)|
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.
- 120 Minutes (Including Test Drive)
What you’ll need:
- Proof of Employment
- Bank Statements
- Mobile Phone
- Drivers License
Understand your budget
Consider a used vehicle
Get pre-approved online
Decide on a down payment
Decide on a cosigner
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:
- 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.
- 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.