If you have bad credit in Canada, you may have a hard time rebuilding, and bringing your credit score back to a healthy level. And there’s a reason for this – having bad credit leads you into a vicious cycle.
You have bad credit, so you’re not able to get a loan. You’re not able to get a loan – so you can’t rebuild your bad credit. We’ve seen this happen over and over again. And while it is possible to rebuild your credit, most people aren’t sure where to start.
So if you have bad credit in Canada, but are on your way back to financial stability, we’re here to tell you about one of the best ways to rebuild your credit score – an auto loan!
Auto loans are a great way to rebuild your credit. Curious? Here are 5 reasons why Canadians with bad credit should consider an auto loan.
1. Lower Interest Rates Than Other Loans
If you have bad credit, you’ll be faced with high interest rates on just about every loan out there. Your bad credit is a sign that you’re a risk.
Even if you’ve dealt with your past debts, lenders may still not be willing to lend to you unless you agree to a sky-high interest rate. From 30% or higher for personal loans, to a mind-boggling 400% APR on payday loans – bad credit really hurts your ability to get a decent interest rate.
However, auto loans for bad credit are usually quite affordable, in comparison. This is because auto loans are secured debt, rather than unsecured debt.
Unsecured debt has no collateral – meaning the issuing bank or company must charge higher interest to mitigate risk. Secured debt like an auto loan or mortgage, however, has collateral.
The bank can repossess your car if you don’t pay, and then they can sell it – reducing risk, and allowing for lower interest rates, even if you have bad credit.
2. Auto Loans Contribute To A Good “Credit Mix”
To rebuild your credit quickly, a good “credit mix” is important. Credit mix is used in FICO scores, and it refers to the different types of debt that you have, such as student loans, auto loans, mortgages, and credit cards, among others.
If you take on a small amount of debt from a diverse mix of creditors, your credit score will improve more quickly. In contrast, if you only use one form of credit – such as a secured credit card – your score will rise more slowly.
So if you need to rebuild your own credit, it’s wise to have a mix of manageable debt – and a smart auto loan is a fantastic way to diversify your credit mix.
3. Auto Loans Can Often Be Refinanced After Credit Improves
This is one of the prime advantages of auto loans, especially if they’re longer-term. After a year or two, many banks and credit unions will allow you to refinance after your credit improves. You’ll be able to get a better interest rate for the remainder of your auto loan term, and you’ll pay it off more quickly.
Usually, banks and credit unions expect a credit score of 600-660 before they’ll be willing to refinance. But with the right auto loan and smart financial decisions, you can easily hit this number before your loan term concludes.
4. Loan Payments Can Be Reduced With A High Down Payment
Down payments are a blessing in disguise for people with bad credit. Many used car dealerships require down payments for people with bad credit – and this is a good thing!
If you save money for a large down payment on a car – say, 30-40% of its value – you can reduce the amount you pay monthly, even if you have a high interest rate.
This makes it easier to manage your debt load, and enjoy the credit-building benefits of an auto loan – while reducing the overall amount you must pay on your loan.
If you put down a large down payment, your monthly payment will be quite reasonable. However, you should take the time to make sure that you’re ready to make a purchase, and that you will be able to make every monthly payment on time. Otherwise, you could be at risk of repossession – and all of the benefits of your auto loan will be lost.
5. Fixed Auto Loans Offer An Easy-To-Manage Debt Burden
Some loans that are issued to Canadians with bad credit have a variable APR – the bank or issuing company can change your interest rate whenever they want. This can mean that you might end up with a loan you’re unable to repay, despite your best efforts.
In contrast, fixed-APR auto loans are incredibly easy to manage. Each month, you have a single auto payment for a set amount – and unless you choose to refinance, this number will not change.
This makes auto loans very easy to manage, compared to variable APR loans and credit card debt. You can always be sure of how much you’ll owe, making it easy to save, and ensure that you make payments on time.
Need A Used Car In Canada? Come To Ride Time Today!
Whether you need to rebuild your credit – or you just need a new set of wheels – Ride Time is where you want to be! Located in Winnipeg, we specialize in serving Canadians with bad credit.
We believe in second chances. So if you can give us just three things – a valid Canadian driver’s licence, proof of 3+ month’s employment, and a pay stub showing more than $1,500/month income before deductions – we can work with our network of 15+ specialized lenders to secure you a fantastic rate on a used car.
Our selection is unbeatable, our rates are reasonable, and our staff is knowledgeable and experienced. So let us help you find your next car – regardless of your credit score!