Getting an Auto Loan with a Low Credit Score in Canada

By John Hayden

Everyone needs wheels to get around, right? Even Canadians with low credit scores have to commute to work, go to classes, pick up groceries, and do a hundred other errands. And there’s no reason why anyone can’t find a car loan, despite a bumpy financial

Some lenders – particularly banks – have higher thresholds and require better credit ratings. At the other end of the market, alternative lenders (like online financing agencies) are willing to work with lower-score borrowers. Smack in the middle of this market, many dealerships are eager to help borrowers find financing that’s tailored to their specific needs.

Lower Credit Scores Need Added Flexibility

Potential buyers with unfavourable credit scores still have good chances of auto loan approval. However, they might have to opt for less than their dream wheels (at least for the moment) and accept higher interest rates.

In Canada, regular auto financing requires a threshold score of 630. But don’t despair – if your score is under 600, there are still plenty of options.  However,  down payments may be larger and interest rates higher. Here’s what to expect when seeking out loans designed for buyers with low credit scores.

  • Deep sub-prime loans are available for credit scores of 300 – 500, at interest rates topping 12%;
  • Sub-prime loans are designed for credit scores of 501 – 600, at interest rates hovering around 10%.

Better Auto Loan Rates for Higher Credit Scores

In contrast, buyers with higher credit scores actually pay less for their vehicles overall, because of lower interest rates:

  • Near-prime loans are offered at credit scores of 601 – 660, at interest rates of around 6%;
  • Prime loans are granted at credit scores of 661 – 780, at interest rates of about 3%.

It’s vital to compare all the offers open to you.  So pay close attention to the small print in the contracts, and make sure you’re getting the best possible deal for your credit level. Before signing anything, draw up a strict budget (getting the entire family involved for easier compliance) to make sure that you can afford your selected vehicle.

Your transport budget should encompass not only your auto loan repayments, but also insurance, road tax, upkeep and maintenance costs, parking fees, and fuel. Don’t forget to leave some wiggle room for unexpected expenses or loss of income.

Improve Your Credit Rating for Better Car Loans

But here’s the good news: even a deep sub-prime loan can quickly improve a weak credit score, through prompt monthly payments. As you build up a reputation for regular repayments, you may be able to refinance your sub-prime auto loan at a better rate, as your credit rating rises.

Pro Tip: Even if you have to scrimp for a few months, it’s well worth saving up enough for a 20% down payment on your vehicle of choice. While cutting down on the amount you need to borrow, this ability to plan your finances also indicates fiscal responsibility – which is a significant plus with lenders.

How to Step Up Your Credit Score

Long before the auto loan application stage, you should do everything you can to pump up your credit rating. Here are two easy ways to upgrade your financial rating, with more favourable vehicle financing conditions.

  • Check your credit rating here to find out exactly where you stand;
  • Contact a credit bureau to fix mistakes in your credit report;
  • Pay off your credit cards in full each month;
  • Settle as many other debts as you possibly can; and
  • Make sure all instalments of your remaining debts are paid promptly.

Pro Tip: When you’re planning to buy a new or second-hand car, spend the previous few months building up your credit score, as this can save you hundreds (if not thousands) of dollars over the term of your loan.

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