If you have bad credit, you’re probably stuck in a vicious cycle that you know all too well.
Here’s how it goes: one of the best ways to improve your credit score is to show that you’re a responsible borrower who makes loan payments on time, but, if you have bad credit, you probably can’t qualify for a car loan.
In turn, you can’t prove you’re a responsible borrower. It’s the ultimate catch-22.
But here’s the good news. It is possible to qualify for a car loan with bad credit. The process may look a little different than it would for someone with excellent credit, but that’s okay.
You’ll be on your way to building your credit score and even better, you won’t be stuck taking the bus or spending money on an Uber every time you need to go somewhere. It’s a win-win.
Here’s the step-by-step process for how to get approved for a car loan with bad credit.
1. Know Your Credit Score
Whether you think your credit score is good, bad or somewhere in between, it’s important to actually know what it is. Never checked your score? It’s ok.
You’re not alone. Less than half of Canadians have ever checked their credit score and only 14% of Canadians check their credit score every year. Yikes. There are a few reasons this may be problematic.
For starters, it’s important to check your credit report for fraud and confirm that everything that is listed on your report – including bank accounts, credit cards and loans – is accurate.
Secondly, it’s much harder to improve things that you don’t track, which can be summed up in one of the most popular business-related quotes: “If you can’t measure it, you can’t manage it.”
Even though this quote is commonly used in business, it’s also true for your credit score. If you don’t know what it is, it will be much harder to improve upon. Beyond that, knowing your credit score will empower you to make the best decision and advocate on your behalf throughout the car loan process. You can order a free copy of your credit report through the credit bureaus TransUnion Canada or Equifax Canada.
Once you know your score, you’ll also have a better idea of how “good” or “bad” it is. According to Equifax, 580 to 669 is typically considered fair, 700 to 749 is considered good, and 750 and up is usually considered excellent. If your credit score is less than 580, it’s generally considered “bad credit.” Luckily, even with bad credit, you can still qualify for a car loan.
2. Set Realistic Expectations
Here’s the lowdown: if you have a bad credit score, it can be harder to qualify for auto loans. When you do qualify, the loans may have higher interest rates. Yet, while having a bad credit score may mean your credit score is lower than you would prefer, you can still get a car loan with workable payments. In fact, your monthly payment for a car loan is determined through three factors:
