Six Steps to a Low Credit Car Loan

Many car dealers advertise financing for buyers with bad credit or no credit at all. Those with less than ideal credit may be able to get an auto loan, but due diligence is required to ensure loan terms are affordable. These steps can help consumers with low credit scores find auto loans that won’t break the bank.

1. Know the score

The first step for potential car buyers who suspect they have bad 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 higher is considered a good credit risk in Canada, while below that number buyers fall into the high-risk 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 in the car. An initial payment of 10% is usually enough to access more favorable conditions. That means buyers interested in financing a $10,000 vehicle should put down a down payment of 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 co-sign a car loan may be able to afford a better financing package. However, this person must submit to a credit check and agree to act as guarantor in the event that the loan is not repaid.

4. Compare prices

High-risk buyers can often pay 9 to 10 percent interest on a car loan, compared to just 3 to 4 percent for those with better credit scores. Buyers should know these numbers when applying for financing. Because loans with interest higher than 10 percent aren’t worth the cost, it makes sense for buyers to get a few different offers before committing to financing.

5. Do the math

In addition to learning about expected interest rates before buying, buyers should be aware of what they can afford and stick to that price range. That means calculating your target purchase price based on the total amount you’ll expect to pay, not the monthly payment you can afford. Buying by monthly payment often means accepting longer loan terms, which is often not a good financial strategy when it comes to buying a car.

6. Provide documentation

The best way to get a favorable car loan despite a low credit score is by establishing good faith in other ways. When looking for a loan, consumers should bring copies of recent pay stubs, utility bills, and other documents that demonstrate their ability to earn income and pay debts.

Although bad credit auto loans 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 of dollars over the life of the financing contract.