Got car loans? You might have trouble financing a new car, though you aren’t totally without options. In fact, some lenders specialize if offering poor credit loans. But watch out — these often charge higher interest rates and fees. You also might need a cosigner to be approved.
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Getting a car loan with bad credit is a lot like getting an ordinary car loan. However, you might have to work a little harder to find the best deal.
Check your credit report. A mistake on your credit report can cost you points on your credit score. You can get a copy of your credit report for free and fix mistakes by contacting the creditor.
Compare, compare, compare. Using a connection service that specializes in bad credit financing can help you quickly get an idea of what rates you’re eligible for, but you might not want to just stick to one — many of these are limited to their network of partners.
Read the fine print. Many provinces have limits on car loan APRs, and some bad credit lenders try to sneak around these by tacking over-priced extras onto the contract.
Ask an expert. Worried you won’t qualify? Sign up for a credit counseling session to have an expert guide you through your options. Click here to visit the Government of Canada’s website where you can find a legit credit counselor who can help you get your finances back on track.
7 questions to ask about bad credit car loans
Before you apply for any loan, find out as much as you can about the offer you’re getting. Ask yourself these questions before you apply.
To get an idea of how much your loan is going to cost, look at the APR. The APR represents the annual cost of having the loan, including both interest and fees and is the easiest way to make a quick comparison of car loans with the same terms.
If you take out a secured loan, the lender is using your car as collateral. While this means you may have a lower rate, you run the risk of having the car repossessed if you default on the loan. Unsecured loans are reserved for people with a higher credit rating and the application process is much simpler.
Loan terms usually run between 2-7 years. A shorter loan term can reduce the amount of interest you pay on your loan overall and help you get out of debt quicker — but your monthly payments will be bigger.
A longer loan term will reduce your payments, but there will be more time for interest to accumulate on the loan, so the overall amount of interest you’ll end up paying will be higher.
You want to find affordable monthly payments. It’s important to choose a loan term that suits your income and is in line with your financial plans, both now and in the long run.
The flexibility of making extra payments can help you get out of debt much quicker. Check with your lender to see if making extra payments is allowed.
If you have the option to choose weekly or biweekly over monthly payments, do so, because this will add 2 extra payments to your loan each year. (Each year, there are 2 months that have 5 weeks in them, not just 4. This won’t affect plans based on a month-to-month schedule, but it will affect plans based on a week-to-week schedule.)
Bad credit loans often come with more fees than other types if car loans. Some lenders charge a monthly account fee or administration fee, which can range from $10 to $20 per month. Many will also charge an origination fee when issuing your funds, usually either 1% to 5% of the loan amount or a specific dollar amount.
Some loans include early repayment fees if the loan is paid in full before the agreed loan term date. If you intend to make extra payments to pay your debt off sooner, check how much you might be charged.
Make sure you know exactly what you’re getting into before you sign up for a car loan (or any loan). If you don’t do your research, you could find yourself in a financial nightmare, or worse, a scam.
Going over-budget. Work out how much money you’ll be paying back over the course of the loan to get an idea of how much you’ll be spending overall on your vehicle — is the amount plus interest worth it? More importantly, can you afford it?
Not checking reviews. Check review sites, messages boards and car enthusiast websites to see what other people are saying about certain lenders. If you know someones who’s been in a similar position when financing a car purchase, ask them.
Extremely long loan terms. Some lenders offer loan terms of 7+ years that can accrue major interest over time. Sure, the monthly payments will be lower, but if it’s not absolutely necessary, you should avoid longer terms to save money.
Being unprepared. Check your credit score before you do any car shopping so the dealer or lender can’t take advantage of you. This will also help you to avoid applying for loans you’re unlikely to get approval for, seeing as each full application requires a hard pull on your credit, which can hurt your credit score. Also, by knowing interest rates that other lenders offer, you’ll be able to compare and find the most competitive deal.
Making an impulsive purchase. Of course your dream car is out there. But if you have poor credit, it may have to wait so you can buy a car you can afford and one that has lower rates.
Alternatives to consider
If a bad credit car loan isn’t the right choice for you, you could consider using a credit card to buy a car. The smart way to pay for a car purchase with a credit card is to buy a cheap car and take advantage of a low interest rate or 0% offer. This way you pay off the balance gradually without the hefty charges associated with a regular credit card or a personal loan.
Another way to avoid taking out a bad-credit loan is to wait. Work towards improving your credit rating by controlling your debts, managing your finances responsibly and knowing what’s on your credit file so that you can remove any errors or disputes from your file.
It depends on your credit rating, the type and cost of the car you’re looking to buy and your financial situation. Be sure to make thorough comparisons and don’t neglect other alternatives, such as using a credit card to pay for a low-cost car or getting a personal loan instead of a car loan.
Do your research. Get online and see what other people are saying about their experiences with different lenders. Talk to people you know who have applied for bad-credit car loans, and read all the terms and conditions before signing on.
Monthly account fees and origination fees can significantly increase the amount that you have to pay back. Some loans will also include a fee for early repayment, so make sure you know the ins and outs of your loan.
Stacie Hurst is an editor at Finder, specializing in loans, banking products and money transfers. She has a Bachelor of Arts in Psychology and Writing, and she completed one year of law school in the United States before deciding to pursue a career in the publishing industry. When not working, she can usually be found messing around with games, photography or floral arrangements in memory of her former days as a flower shop assistant.
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