If you’re trying to buy a car with bad credit, there are two primary types of loan available to you – fixed rate loans, and variable rate loans.
When you get a fixed rate loan, the lender gives you the money with a set interest rate – 6%, for example. This number is used to determine the interest for your loan throughout its entire repayment period.
A variable rate loan, on the other hand, can have its interest rate changed by the lender. It may start at a low rate – say, 5% – but as time goes on, the lender is free to increase it or decrease it as much as they want.
Usually, variable rate loans are offered at a lower starting APR than fixed loans. If you have bad credit, and are looking to get a good deal on a car, this may make them appealing. However, Canadians with bad credit should usually avoid variable rate loans. Here are a few reasons why.
1. Your Finances Will Be Unpredictable
This is the single biggest reason to avoid variable rate loans. If you have bad credit, chances are that you have had difficulties managing your finances in the past – and you’ve been late on credit card payments, had a car repossessed, or perhaps even declared bankruptcy.
When it comes to rebuilding your credit, and your financial life, predictability is absolutely essential. And variable rate loans are unpredictable.
With a fixed-rate loan, you have a single auto payment you must make each month. This auto payment is always the same. If you can pay it, you keep your car and get to rebuild your credit.
A variable loan does not offer that stability. You might pay less at first, but if the APR changes, you may suddenly find yourself with a skyrocketing monthly payment that you cannot afford. You risk getting your car repossessed, or harming your credit with late payments.
2. You Could End Up Paying More In The Long Run
The main appeal of a variable rate loan is that it offers low up-front costs. But in the long run, you may end up actually paying more than you would with a fixed-rate loan.
This is because of amortization. When you get an auto loan, the first year or two of payments go primarily towards paying interest, not paying down the principal (loan amount.)
If your variable interest rate goes up after a year, you will find yourself paying much more money towards interest, and less money toward the actual value of your loan. In time, this results in a much higher overall cost.
3. Variable Rate Loans May Be Longer-Term – Resulting In Higher Costs
To make a variable rate seem more affordable, dealers may offer long-term loans that are over 60 months. As a rule, this is not good for consumers.
The longer a loan is, the more you pay in interest. For example, a 3-year, 5% APR fixed rate loan for $15,000 has a total cost of $16,184. A 5-year 5% APR fixed rate loan for $15,000 has a cost of $16,984.
Variable rates make long-term loans even more affordable. Interest may compound over time, and as APRs continue to grow, you may be faced with making unaffordable payments for years – long after the car has become nearly valueless.
4. Shady Dealers May Purposefully Increase Interest Rates After Promotional Periods
This usually happens at “Buy Here, Pay Here” dealerships. At these dealerships, the dealer is also the lender – they give you the money to buy the car directly. This means they are in direct control of your variable interest rate.
One way that these shady dealers take advantage of Canadians with bad credit is by offering low-APR variable loans – often with a 0% APR for several months, or up to a year.
Then, after they have collected your money for the promotional period, they will ratchet the APR to 25% or beyond – and you’ll have to either pay it, or have your car repossessed. Either way, they win – if you pay, they profit. If you don’t, they repo your car, and resell it to someone else.
Trust Ride Time To Get You A Great Loan – From A Great Lender
We know how hard it can be to get a car with bad credit in Canada. But you don’t have to get into a long-term, variable APR loan just to get the transportation you need.
At Ride Time, we have a network of 15+ lenders who work with us to issue loans for Canadians with bad credit. We offer reasonable rates, good repayment terms, and fixed APRs. If you have been employed for 3+ months, make more than $1,500 month before deductions, and have a valid Canadian licence, we’re here to help.