It has been estimated that around 23% of Canadians have average or below-average credit. Around 2% of Canadians have “bad credit”, defined as a score below 520. Bad credit is a fact of life for many Canadians – and it can cause quite a few problems for you.
Canadians with bad credit often struggle to get approved for auto loans, for example. If you are a high credit risk, you might have a hard time getting loan approval from a bank or credit union.
However, there are some simple steps that you can take to maximize your chances of being approved for an auto loan – even with bad credit in Canada.
1. Start By Understanding Your Credit Score
There are a variety of factors taken into account by banks – your income, debt utilization, employment history, and the size of your loan, among others.
But the single most important factor for loan approval is your credit score. A high credit score means you’re a low risk, and will likely repay your loan, while a low score signals risk to lenders – and makes them more wary of lending to you.
Before applying for an auto loan with bad credit, you need to understand your credit score – and why it’s low. Use your free yearly credit report from TransUnion or Equifax to get the details about your credit score.
You’ll be able to identify which events had the largest impact on your score, and you can take the first steps towards rebuilding your credit. You can also identify potential errors on your credit report – resolving these can help boost your score very quickly.
2. Pay Down As Much Debt As You Can
If you have outstanding credit card bills or loans, you need to pay them off as quickly as possible – while your accounts are still active. If you don’t pay active debts, your lender may close your line of credit – which has a further negative impact on your credit score.
If you can contact lenders and negotiate a repayment strategy, they may even be willing to have some of the negative items on your credit report removed. Paying your debts will also reduce your credit utilization – potentially improving your score.
Paying down debt also helps you become more financially healthy. You’ll no longer spend extra money making minimum monthly payments – so you can start saving more money each month, and become more financially stable.
3. Start Saving Money For A Larger Down Payment
Think about how you can tighten your budget to save money for a large down payment.
If you can make a large down payment on a car, you can take out a smaller loan. For example, if you want a car that’s worth $10,000, and you can make a $5,000 down payment, you only have to take out a $5,000 loan.
If you have bad credit, a smaller loan is more likely to be approved by a bank, because you’re more likely to be able to repay it, and the risk is reduced. In addition, making a large down payment reduces the total amount of interest you have to pay on your loan, and makes your monthly payments quite a bit smaller.
4. Put Together A Comprehensive Financial History
If you have had credit issues in the past, but are now financially stable, create a financial history report that proves this. Gather together all of your information about your past debts, repaid loans and bills, extant debt, income, employment, and assets – and bring it with you when applying for loans.
Often, smaller banks or credit unions will be willing to issue a loan to Canadians with bad credit if they can prove that they are taking steps to move in the right direction, and improve their financial health.
5. Shop Around For Multiple Lenders
It’s best to try to get pre-approved by multiple lenders for an auto loan. If you apply to multiple lenders within a short period of time, your credit won’t be negatively affected – and you’re more likely to get approved by at least one lender.
Need A Car In Canada? Got Bad Credit? Ride Time Is Where You Want To Be!
At Ride Time, we specialize in selling great cars to Canadians with bad credit. Whether you have poor credit or no credit, our specialized auto lenders can help you get a loan with just some basic information about your income and employment history.