The stigma of a poor credit rating can be painful and isolating. But whether divorce drove you into bankruptcy, or you defaulted on a loan after you lost a job, you need to remember that you’re not alone. Unfortunately, Equifax Canada has reported that the average credit score among every age group over twenty-five declined during the 2010s . If you find yourself caught up in this trend, you may think it’s impossible to find financing for a new car. But we’re happy to report that, if you follow our advice, financing is no pipe-dream.
“How did my credit get this bad in the first place?”
A poor credit score often occurs from a misunderstanding of the factors that go into building one. As you can see from the chart below, it’s about so much more than whether or not you pay your bills on time.
“What does my bad credit score say to the bank?”
A credit score below 620 tells lenders that your credit likely has some bruising. It’s true that the lower your score, the higher the risk you are to the lender which also normally means a higher interest rate. Lenders today have programs for most credit profiles which is why it’s always a good idea to get pre-approved before you go into the dealership to avoid any surprises.
“But how do I do that?”
Repairing your credit is earlier than you think. The length of time it takes depends on what rebuilding you need to do. A simple reporting error can be fixed in a month or two, but bankruptcy can stain your credit for up to six years. Fortunately, there are some steps you can take to stabilize it:
- Pay off anything that’s sitting in collections.
- Make sure you keep your credit card balances at no more than half their limit
- Bring all your accounts up to date.
“Cool. But where should I go for a car loan?”
First off, there are many great and reputable dealers you can work with to get a car loan. Even if your interest rate is higher than ideal right now a car loan is an excellent way to rebuild credit as it demonstrates a new pattern of repayment to the lenders. You also only need to stay in a higher interest loan for a specific period of time before you qualify for much better rates.
Don’t be shy about giving us a try!
Just make sure that you finish all those car loan applications within a fortnight. Having too many credit inquiries over too long a period can further damage your rating.
“Got it. So, what do I need to do to get a car loan?”
There are five simple things you can do to make securing a car loan on bad credit easier:
- Be realistic about what you can afford. Maybe go with a Nissan Frontier instead of a Jeep Gladiator. Go used instead of new, or buy instead of lease. But, if you do lease, keep the term as short as possible and try to keep your payment to less than ten percent of your monthly income.
- Come with a healthy down payment. The higher your down payment, the less of a risk you are to the bank. It also helps to have a car to trade-in, as that reduces the principal of the loan.
- Make sure your credit reports are error-free. Grab a copy of your credit report from a site like Credit Karma or an official bureau like Transunion or Equifax. Read it over carefully and, if you find any errors, dispute them with the responsible agency.
- Bring your pre-approvals with you. Don’t fall victim to a dealership that prays on people with bad credit. Come armed with a pre-approval and start the negotiation from a favorable position.
- Get a cosigner. A cosigner is someone who agrees to make your loan payments if you can’t hold up your end of the bargain. It’ll make it easier to get a loan, but don’t do it unless you’re confident you can keep the car.
“My application was declined. Now, what do I do?”
Don’t be insulted by this. The lender’s trying to keep you out of financial trouble and, since they’re required to tell you why you’ve been denied, they can give you some valuable insight into the reasons why. If it’s because of something on your credit report, the law also says that you can ask them for a copy (saving you from having to pay for one yourself).
But don’t let it stop you from trying! Try a new bank or, if you’re at a dead-end, take a break and save up for a bigger down payment. If you need a car right away try to find someone willing to cosign for you.
“Anything else I should do?”
So you’ve picked the car, secured financing, and have all the paperwork in hand. No more headaches, right? Well, unfortunately, before the dealer hands you the keys you’ll have to provide proof of income and insurance. Don’t be surprised if your poor credit rating leaves you paying a premium on those.
Also, consider refinancing after a year. With a year of well a well paid auto loan, your credit score has likely gone up. This will result in a better interest rate and (possibly) lower monthly payments.
“What do I do if I can’t make a payment?”
It’s important to face a problem like that before you’re in too deep to climb out. Start by reaching out to your lender. Most banks are eager to help you avoid defaulting because, without you, they wouldn’t make any money.
If your inability to pay is short term, most lenders will defer your payments on a month to month basis. Interest will continue to accrue, but you won't have to make monthly payments. If you can scrounge some money together, be sure to throw some at the interest.
For long-term issues like job loss or disability, you’ll want to contact your lender to see what your options are but if you are not able to make your payments you will have to look at other options which could include selling the car. The good news is that this can often be avoided by adding insurance protections at the time of purchasing your car which will look after your payments in case of job loss or health related issues.
Ready for a new vehicle?
Having poor credit shouldn’t doom you to a life of duct-taped jalopies. That’s why we’re proud to affiliate with lenders who believe in second chances as much as we do.
So fill out our application and see what you qualify for today.
