How to Get a Bad Credit Car Loan in Canada

By Heidi Unrau | Published on 06 Aug 2023

Bad Credit Car Loans

    You can almost feel the steering wheel under your fingertips, hear the purr of the engine, and inhale that new-car smell. But uh-oh, you have bad credit. Will you ever get to drive that dream off the lot? Enter bad credit car loans. 

    These are financial products tailored for people with less-than-stellar credit histories. Some lenders specialize in helping folks with bad credit get back in the driver’s seat. They understand that life happens and are willing to give you a boost. Here’s everything you need to know about bad credit car loans in Canada.

    What is a ‘bad’ credit score?

    In Canada, credit scores range from 300 to 900 points. The specific range considered “bad” varies between the credit bureaus and the model they use to calculate your credit score. But generally, it can be broken down as follows:

    300-579: This is typically considered to be a bad credit score. If you fall within this range, it indicates to lenders that you are a high-risk borrower, and it could be difficult to secure a loan or credit.

    580-669: This is often categorized as fair or poor. While not as severe as the previous category, you’ll probably struggle to get approved for financing. You’re also going to face higher interest rates compared to people with higher scores.

    670-739: This is seen as a good credit score. Borrowers within this range are likely to be approved for loans and will receive decent interest rates.

    740-799: This is considered a very good credit score. Borrowers in this bracket will not only have an easy time securing loans, but they’ll also be offered competitive interest rates.

    800 and up: This is an excellent credit score. People with scores in this range will get the best interest rates and most favourable terms.

    Beyond your credit score: what else do lenders look at? 

    Your credit score is not the only variable lenders consider when assessing your loan application. They also look at your income, job stability, debt-to-income ratio, and more. Lenders typically follow a formula called the “5 Cs of Credit” for a holistic picture of your financial situation and creditworthiness. 

    However, a bad credit score definitely makes it challenging to get a car loan. It’s the first qualifying factor traditional lenders look at, and most have a minimum credit score threshold to filter out the applicants that most likely don’t meet their risk model.

    That’s where specialized financial solutions like bad credit car loans come in. These products can help you get behind the wheel despite your credit collisions. And they’re typically offered by private lenders rather than traditional banks. 

    What are bad credit car loans?

    A bad credit car loan, much like the name suggests, is a type of loan designed specifically for people who have a bad credit score, weak credit history, or no history at all. It’s very much like a traditional car loan in its basic structure: you borrow money from a lender to purchase a car, and then repay the lender over a predetermined period of time with interest.

    Traditional vs bad credit car loans: the main difference

    The biggest difference lies in the demographic they cater to and the terms of the loan. Traditional car loans are primarily offered to people with good to excellent credit scores. Lenders consider these people to be lower-risk borrowers because their credit history reflects consistent on-time payments and other positive behaviour.

    On the other hand, bad credit car loans are primarily offered to people with lower credit scores who might have had past financial trauma like bankruptcy, missed payments, bills sent to collections, or maxed-out credit cards. Because lenders see these people as higher-risk borrowers, the terms of bad credit car loans are usually pretty strict. 

    Borrower beware: drawbacks of bad credit car loans

    While bad credit car loans and traditional car loans serve the same basic function, they differ significantly in terms of who they’re designed for, the loan terms, and the long-term financial implications for the borrower. Below are common features you can expect from a typical bad credit car loan:

    Higher interest rates

    Brace yourself—bad credit car loans usually come with higher interest rates due to the increased risk lenders take on. But don’t let this discourage you. While you might be paying more in the long run, this is also an opportunity to rebuild your credit.

    Shorter loan terms

    Bad credit car loans often come with shorter repayment periods. While this could mean higher monthly payments, it also allows you to pay off the loan quicker and potentially pay less interest overall than a traditional car loan term. 

    Loan security 

    Many bad credit car loans are secured, meaning the car itself serves as collateral. That means if you fail to make your payments, the lender can repossess your car to recover or minimize their loss.

    But, there’s an opportunity…

    Despite the downsides, a major plus is that by repaying a bad credit car loan on time, you can gradually improve your credit score. This can help you access lower rates and better terms in the future. You may even qualify to refinance your bad credit car loan with a traditional lender, like your own bank or credit union, to get a lower interest rate!

    Game of loans: dealer financing vs a private lender

    Imagine you’re at a four-way stop sign. Three roads lead to your desired destination: a shiny, new (or new-to-you) car parked right in your driveway. One road is a dead end, one leads to dealership financing, the other to private lenders. 

    Most traditional lenders, like the big banks, won’t lend to people with bad credit – so consider them a dead-end. Which of the other two roads should you take? Let’s turn on the high beams and shine a light on both options to help you make an informed decision.

    Dealer Financing: the direct route

    Many of us love one-stop shopping, and that’s precisely what dealer financing offers. This road is straight and simple: you choose your car, negotiate the price, and apply for financing, all in one place. For many of us, this convenience alone is like a perfectly paved highway on a sunny day.

    Now, let’s address the elephant in the car—the question of bad credit. Dealerships typically have relationships with a variety of lenders, including those comfortable financing bad credit borrowers. 

    Some dealerships even offer “buy here, pay here” financing through their own in-house financing department, which means they grant the loan themselves without involving a third-party lender.

    This might sound like your green light, but remember to read the fine print. These loans often carry high interest rates, very strict repayment terms, and tons of fees which could end up being a financial flat tire for you down the road.

    Private lenders: the scenic route

    Switching lanes to private lenders, this route may not offer the same one-stop convenience, but it does come with its own set of attractions. Compared to dealerships, private lenders tend to provide more personalized service, flexible terms, and they’re often more willing to consider your whole financial picture beyond just your credit score.

    They’re used to navigating the rocky road of bad credit – obviously. Private lenders tend to provide more tailored solutions that could fit your situation better than the sometimes rigid, one-size-fits-all options at dealerships.

    The journey with a private lender might take a bit longer—you’ll have to separate the car buying process from the loan application process. However, the potentially lower interest rates and more comfortable repayment terms can make this route worth the drive.

    Which road to take?

    So, which is the better option? Well, like deciding between a sexy sports car or a family-friendly SUV, it depends on your personal needs and circumstances.

    If you prioritize convenience and speed, and you’re comfortable with potentially higher interest rates, dealership financing might be the road for you. But it could cost you, which isn’t the best long-term use of your money. 

    If you prefer a more personalized approach, potentially lower interest rates, and you don’t mind the extra legwork, then you’re better off driving down the private lender lane. 

    Ideally, you want to shop around and compare the rates and terms offered by dealerships vs private lenders. The ultimate goal here is to choose the route that will make your car ownership journey as smooth as possible while also making the best possible use of your money.

    Where to get the best bad credit car loans in Canada

    The road to the right lender is all about finding the one that best suits your financial and personal needs. So let’s hit the road and check out these fantastic options:

    Car Loans Canada

    Car Loans Canada is an online platform that offers a broad range of car loans, including those for people with bad credit. To find the best bad credit car loan for your situation, start by filling out a simple online application— it’s easier than parallel parking, I swear! Based on your information, Car Loans Canada matches you with suitable lenders in their extensive network.

    This platform has a reputation for having a high approval rate, and they accept all credit scores. So even if your credit history is a write-off, they won’t leave you stranded on the side of the road. 

    Loans Canada

    Next on our journey is Loans Canada. This is Canada’s first loan comparison site, kind of like GPS to help you find the best route to your financial goal. They offer bad credit loans, which you can use to buy a car, and all credit scores are accepted. Fill out one application, and voila, you’re matched with various potential lenders.

    Loans Canada is about more than just car loans. It provides resources to help you understand and improve your financial health. Consider it your roadside assistance for any credit hiccups you might encounter along your journey.

    Clutch

    Now, let’s shift gears and steer towards Clutch. They’re an online used-car dealership offering financing options from various lenders across the country, including private lenders more likely to approve bad credit borrowers. You can browse cars, pre-apply for a loan without impacting your score, and have your new vehicle delivered right to your door.

    It’s a full-service pit crew that saves you time and effort. For those with bad credit, Clutch might be an appealing option because they consider more than just your credit history. They look at the whole picture to give you an opportunity to get behind the wheel.

    Loan Connect

    Last but not least, we have Loan Connect, another search engine for loans that works faster than a Formula 1 car on the Autobahn. With Loan Connect, you fill out a quick application, and within minutes, you can view several loan options based on your financial profile.

    They work with a variety of lenders, including those who specialize in bad credit loans. This means you have a good chance of finding a lender that understands your situation and is willing to work with you.

    Gear up for approval: 8 simple steps to increase your chances 

    It’s time to shift gears again and zoom-zoom toward your dream ride. Yes, you may have hit a few speed bumps on your credit journey, but that shouldn’t stop you from getting approved for a bad credit car loan. Buckle up and bust out this roadmap to increase your chances of getting approved:

    1. Know your score

    Before you start revving up for a bad credit car loan, it’s important to understand the lay of the land—or in our case, the winding road of your credit history. Get your hands on a copy of your credit report and check out your credit score. There are tons of apps that let you check your credit score for free as many times as you want – without affecting your score. 

    Don’t get too deflated if it’s on the lower side. Remember, this journey is about making a U-turn! A credit score app like Borrowell can help you get back on track. 

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    2. Budget wisely

    Car loans aren’t just about the sticker price. When you’re budgeting, consider the related costs of car ownership like car insurance, gas, maintenance, and other unexciting car-related expenses. You don’t want your bank account to stall after financing a car, right?

    3. Compare lenders

    Next, shop around. There are several lenders in the Canadian market who won’t consider your credit score as the be-all-end-all of qualifying factors. Compare car loan offers, look at the interest rates, and read the fine print. No one likes being bombarded, but this is one time when you’ll appreciate having lots of options.

    4. Consider a co-signer

    If your credit score is really really bad, having a cosigner with a solid credit score can significantly increase your chances of approval. It’s like having Bluetooth GPS on a tricky route. Fair warning though, ensure they understand their role and the risks involved. Co-signing is a big responsibility, and they need to be ready to take the wheel if you can’t make the payments.

    5. Make a larger down payment

    Putting down a hefty down payment might feel like a blow to your savings, but it could increase your odds of approval. It’s like filling up your gas tank before a road trip—you know you’re well-prepared for the drive ahead.

    6. Be honest

    Don’t try to trick lenders with false information. Always be honest about your financial situation. Dishonesty could result in loan denial or worse, and trust me, you don’t want to go down that one-way street!

    7. Show proof of income

    Lenders need to know that you can make payments on time. Providing proof of income is like showing a cop your valid driver’s license—it gives them confidence in your ability to handle the loan.

    8. Aim for shorter loan terms

    While longer loan terms mean smaller monthly payments, you’ll end up paying more in interest in the longrun. It’s like taking the scenic route—you’ll enjoy the ride, but it takes longer and uses way more gas (which is hella expensive!). 

    Soup up your score: how to use the loan to improve your credit

    Who knew that getting a bad credit car loan could put you in the fast lane to improving your credit score? Your car loan is more than just financing, it’s also a powerful engine that can help speed up your journey to better credit. Here’s how to use your bad credit car loan to your advantage.

    Regular on-time payments

    First things first, the best way to make your car loan work for you is to make your loan payments on time, every time. It’s like sticking to the speed limit – it keeps you out of trouble. Consistently making your payments on time shows lenders you’re a responsible borrower. Think of each payment as a stepping stone on your path to a healthier credit score.

    Don’t buy beyond your means

    Sure, that sporty convertible might look tempting, but always choose a car (and consequently, a loan) that suits your budget. Why? Because you’re more likely to make timely payments on a loan you can comfortably afford. It’s like choosing a scenic, stress-free route over a bumpy, pot-hole infested road.

    Pay more when you can

    Just like we tend to get a wicked case of lead-foot when the road is clear, consider doubling down with larger payments or extra payments when you can. This will help you pay off your loan quicker and save on interest. Lenders love seeing this – it’s a clear sign that you’re a dependable borrower, leading to a potential boost in your credit score.

    Monitor your progress

    Don’t forget to regularly check your credit score. This way, you can see your improvement in real-time, just like watching the kilometers tick by on your road trip. Plus, it helps ensure that all the information on your report is accurate. You don’t want a mistake or a forgotten old debt to act like a flat tire getting in the way of your progress. 

    Trust the process

    Finally, improving your credit score is more like the Targa Rally and less like a Nascar Race. It’s okay if you don’t see immediate results – just stay on the road and stick to the plan. Over time, consistent responsible behaviour with your bad credit car loan can help improve your credit score.

    In the words of Jimmy Eat World, “It just takes some time. You’re in the middle of the ride.” 

    FAQs about bad credit car loans in Canada

    Can I get approved for a car loan with bad credit?

    Yes you can. Lenders like Clutch, Car Loans Canada, and Loan Connect often consider other factors beyond your credit score, improving your chances of approval.

    How do bad credit car loans work?

    Bad credit car loans work much like regular car loans, but they usually come with higher interest rates to account for the added risk. The loan amount is used to purchase a vehicle, which you then repay over a specified term with interest. 

    How to get a car loan with bad credit?

    Apply through a private lender or service that specializes in bad credit car loans. Make sure to check your credit report, gather the necessary documentation, compare quotes, and choose a loan that fits your budget.

    Can you get a car loan with bad credit?

    Absolutely, yes! There are several lenders in Canada, like Car Loans Canada and Loans Canada, that are willing to work with people who have bad credit.

    Can I get a second car loan with bad credit?

    Yes, it’s possible, but not guaranteed. It can be trickier due to the increased risk to the lender. Showing a history of consistent, on-time payments on your current car loan can improve your chances. You will also need to demonstrate that you can afford to take on another loan. You’re more likely to be approved if you have steady and gainful employment. 

    How to refinance a car loan with bad credit?

    Refinancing a car loan with bad credit is about finding a new lender who will pay off your existing loan and offer you a new one, often with a lower interest rate or a longer repayment term. Start by checking your credit score and shopping around for lenders who specialize in bad credit car loans

    Can I get a $20,000 car loan with bad credit?

    Yes, you can, but it’s not guaranteed and the interest rate might be higher. The exact amount you can borrow will depend on several factors, including your income, how much debt you have, and the lender’s policies.

    Can I get a $40,000 car loan with bad credit?

    Potentially, yes. But remember, a larger loan means higher repayments and more interest. Always make sure the loan you’re taking on is affordable and within your budget. Your approval will depend on factors such as your income, employment stability, debit load, and the lender’s guidelines.

    Heidi Unrau is a senior finance journalist at Hardbacon. She studied Economics at the University of Winnipeg, where she fell in love with all-things-finance. At 25, she kicked-off her financial career in retail banking as a teller. She quickly progressed to become a Credit Analyst and then Private Lender. This hands-on industry experience uniquely positions her to provide expert insight on loans, credit scores, credit cards, debt, and banking services. She has been featured in publications such as WealthRocket, Scary Mommy, Credello, and Plooto. When she's not chasing after her two little boys, you'll find her hiding in the car listening to the Freakonomics podcast, or binge-watching financial crime documentaries with a bowl of ice cream. Fun Fact: Heidi has lived in five different provinces across Canada and her blood type is coffee.