Buying a car? If so, then you may want to check your credit history to make sure you are eligible for a loan. Bad credit accumulates when you fail to keep up with your credit agreements. So, if you don’t pay your credit card bills on time, have a negative balance on your bank account or worse have filed for bankruptcy and had your assets repossessed, then your credit history is probably not that good.
Having bad credit is not the end of the world, however, since it does not immediately disqualify you for a car loan. While you might not have the leverage of those with good credit, lenders are still willing to assess the risk and offer you a loan if you are able to meet their criteria.
In this article, we will go through the steps to help you buy a car, while handling the prerequisites of having bad credit.
Get a Credit Report
First things first: you want to actually find out if you have bad credit, and how “bad” it is. Don’t simply take someone’s word for it and instead acquire a credit report through a credit report agency. In Canada, there are two notable agencies: Equifax and TransUnion.
If you have ever used a credit card, taken out a loan or signed up for “buy now, pay later” offers, then you have a credit history, which will be visible in your credit report. In it, you’ll be able to find your credit score, a three-digit number that ranges from 300-900. While there are a number of different credit scales, generally, if the closer you are to 900, the better your score is. If your score is below 500, then you have bad credit.
Get Pre-Approved With Different Lenders
When you have bad credit, the term “bad” may not be as bad for some lenders as it is for others. That is why it’s important to reach out and seek approval from different lenders.
A good place to start are those dealerships that advertise their financial aid for people with bad credit. You know, those commercials that hark, “No credit? Bad credit? No problem.” Those dealerships are probably a good place to start. Many of them have online credit applications for you to get pre-approved.
It’s also worth connecting with your bank and credit union. You already have a financial relationship, which is why they will be more willing to approve you.
Researching and getting pre-approved does not hurt your credit score. Shopping and searching around for the best rates is the name of the game and lenders know that.
Bring Proof That You Can Pay Off Debts
You want to prove that you are an accountable person. The “bad” credit you have is not the only thing lenders look at. When discussing a car loan with dealerships or lenders, it’s important that you also supply documents to back up your claims. These documents can include (but not limited to): recent pay stubs, utility bills, driver’s license and three personal references (friends, colleagues, landlord, etc.)
Anything that you believe will alleviate the risk factor is good. That can even mean bringing a friend or family member to help and support you.
Make Sure Your Price Range is Right
If you have bad credit, the last thing you want to do is overspend. That is why it is a good idea to stay within your limit, even if you qualify for a bigger loan. Let’s say you are qualified for a $30,000 sedan, but that doesn’t mean you should buy it. Instead, you can save by getting a $20,000 compact or hatchback. All your monthly savings can then go toward paying for the necessities of owning a car, including gas, insurance, maintenance and so on.
Also, you should always keep in mind that you are shopping for the best loan, not the best monthly payments. Just because you have a lower monthly payment and a longer time to pay off the loan, that doesn’t make it a good deal – it may in fact be very bad.
Pay Attention of Interest Rates
Whenever you borrow money from a lender, you’ll have to pay interest. For someone with bad credit, it can be a costly aspect of car buying. It’s a good idea to do some research and find the average for interest rates in correlation with your credit score.
Experts recommend that you put down at least 20 per cent of the total new car price and 10 per cent of the used car price. Bad credit financing is nothing new, but you want to be smart about it in the long run. The last thing you’d want is to worsen your credit score.
How to Improve Your Credit Score
Whether you get approved for your loan or not, it’s worth rebuilding your credit history and improving your score.
Begin by paying all your bills on time. Any late payments may lower your score. If you have debts, pay them off as soon as possible. Don’t exceed your credit limits. The higher your balance, the more likely it is to affect your credit score. Have less credit applications. While asking for information or going through the pre-approval process will not lower your score, applying with too many potential lenders in a short period of time may actually hurt your overall score.
Finally, be wary of companies that make claims that they will repair your credit history for a fee. Some information cannot be removed from your credit history, even if a third party claims there are loopholes and laws that can assist you.