Bad Credit? 5 Tips on Getting a Fair Car Loan

In most of Ontario, you need a car. As good as public transportation can be in some cities, it can still turn a 15-minute drive to work into a 45-minute hike. You could use that extra time for family, friends, or even working a second job. But if you have bad credit, you may believe you’re stuck with the sludge at the bottom of the gutter when it comes to car loans. You’re not. If you want to buy a car but have bad credit, you still have financing options.

1.  Improve your credit rating first if possible & set your budget

If you’re able to hold out for a while without a car, this tip can help you save on monthly payments down the road. For example, pay all bills on time and use a credit card with an amount of credit that works for you, and pay it off religiously. Developing a healthy credit history can lower the interest rate. It may not be by much, but it will help you in the long run.

Also calculate your vehicle budget. Owning a vehicle costs more than just your monthly lease or loan payments.

2.  Stay practical

Get a car that will safely carry you (and your family) from point A to point B. And that’s it. Having bad credit when trying to finance a car means you need to avoid all the bells and whistles that raise the price. This can be hard, but remember this obvious point: the lower the price of the vehicle, the less you’ll lose to interest and the easier it will be to make payments.

3.  Get a loan for 24 months or less

Short-term loans, if paid well and reported to a credit bureau, can give you leverage to apply for a lower interest rate when your loan is up. Philip Engs, president of CMH Auto Superstore, leased vehicles in-house for 27 years. He says, “In some cases the term would be stretched to 28 or 30 months, but if the term becomes too long, the total interest burden to the customer becomes too large.”

At the end of your term, if you’ve paid everything on time and the dealership has reported your payments to the credit bureau, you may receive a lower interest rate. That way, you’re not paying 29% interest for five years.

4.  Deal with a reputable dealer or sub-prime finance company

Having bad credit doesn’t mean you don’t deserve respect. The company you choose should give you full financial disclosure, says Engs: the annual interest rate, the administration fee, buyout—if any—and the total amount of interest you’ll be paying over the term of the lease or loan.

“A common trick in sub-prime financing/leasing is to charge a large administration fee,” he explains. “So you may think you are paying 25% interest but if the admin was factored in, it is actually like paying 30% or 35%, interest depending on the deal.”

Engs provides some math to illustrate: If you lease a vehicle worth $10,000, pay 30% down, and have a term of 24 months, at 25% interest, you would pay $373.60/month, with $1,966.41 in interest. If you’re charged an admin fee of $1,299, your monthly payments increase to $442.93 and your interest rate is actually 43.83%.

5.  Make a larger down payment

Engs requested customers to pay 30% down before entering a lease, which lowered the client’s monthly payments. If you find a dealer who doesn’t ask for much of down payment, don’t sign the deal, as tempting as it might be. By making it easier for you to pay your monthly balance, you also lower your risk of NSF fees and late-payment charges.

In the end, financing a car with no credit is possible, but it’ll be up to you to improve your credit. Remember: you’re not the only one out there with bad credit who’s trying to finance a car. Get referrals and research online to find the right company to help you up again. You will pay a higher interest rate because of your credit history, but Engs says that if a company says you have to pay 35% or more in interest, “consider walking.”


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