Understanding Bad Credit – How Auto Loan Lenders Make Decisions

Automotive Finance, Bad Credit, Credit Education

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Car Loan

Many Canadians have sub-par credit. It’s estimated that around 20% of Canadians have a score that falls below 680, meaning they have “bad” credit.

Now, few Canadians suffer from what’s known as “extreme” credit risk – only about 3 percent of Canadians have a score of under 520, which means they’re incredibly risky for lenders.

But what causes bad credit? What causes good credit? How do car loan lenders, credit card companies, and other financial institutions interpret your credit score, and what can you do to raise it?

We’ll answer all of these questions and more in this article, and talk a bit about how car lenders make decisions based upon your particular credit score.

How Do I Check My Credit Score?

There are two primary credit bureaus in Canada. Equifax Canada, and Transunion Canada. And it’s estimated that over half of Canadians have never checked their credit score.

Even if you have good credit, failing to check your credit score can cost you – if you have a great credit score, you can negotiate better deals on loans, credit cards, and other financial instruments.

You don’t have to pay to receive a credit report. Both of these institutions offer a free physical copy of your credit report by mail. Complete details of the methods by which you can order these credit reports are available on Equifax Canada and Transunion Canada.

You will need to furnish some basic background information about yourself, usually over the phone, and provide identification through some combination of a driver’s licence, passport, and birth certificate.

In about two-three weeks of time, you’ll get your credit score in the mail.

What Does My Credit Score Mean?

Simply put, your credit score is a measure of risk – it’s a way that financial institutions can assess your ability to repay borrowed money without meeting you in person.

Having a high credit score (700+) means you have successfully taken on debts and repaid them in the past, and are a low-risk borrower. Having a low credit score (680 or less) means that you have had difficulties repaying debts in the past, or don’t have an extensive credit history, making you a more risky borrower.

It’s important to note that just having no debt does not mean you’ll have a good credit score. If you’ve paid for things with cash your whole life and never been in debt, that’s a good thing – but your credit report will show zero borrowing activity, meaning there’s no record of your ability to take on debt and repay it.

What Helps My Credit Score? What Hurts It?

A good credit score means that you have consistently taken out small loans, credit card bills, and other forms of debt, and consistently repaid them according to the borrowing terms. Doing so builds up a history of good repayment, and makes you less risky for lenders. It’s clear that you have the ability to consistently borrow and repay money, so it’s a no-brainer for a lender to approve you.

A bad credit score means that you have been unable to consistently repay the money that you owe on your accounts. Unpaid credit cards, charged-off accounts, and loan defaulting can all contribute to this.

Interestingly, it’s not just unpaid debt that can contribute – having a consistently high debt utilization ratio can also damage your credit. Debt utilization refers to the amount of money you are able to borrow, vs. how much you have borrowed.

For example, if your credit card has a $5000 limit and you have used $4000 of it and are making minimum monthly payments, you’re at an 80% debt utilization ratio. This can damage your credit score because it’s a sign to lenders that you are unable to repay your debts in full – you can only make minimum payments, and never actually reduce your debt utilization.

Why Do Auto Lenders Prefer High Credit Scores?

Because lenders are all about mitigating risk. That’s what lending money is about – if you lend money to someone, you profit by getting that money back – plus a small amount of interest for your service of lending the money in the first place.

A great credit score is an indicator that you are not a big risk – in fact, a credit score of over 700 is usually a total no-brainer for a lender. They see that you can repay your debts and have done so successfully in the past, so they’re willing to work with you to negotiate a reasonable rate.

As your credit score falls, so does the likelihood of finding a good rate on a car loan – you become a riskier bet. If you have a low credit score, you have obviously had issues repaying loans and creditors in the past. This means you will face higher APRs, more strict repayment schedules, and in extreme cases, you may not even be able to find a loan at all.

How Can I Get An Auto Loan With Bad Credit?

Well, there are several ways. A financial institution can pre-approve you for a high-APR auto loan if you explain your situation and are willing to take on a high interest rate. Some auto dealerships have in-house lending services – but these are usually scammy and offer poor, or even variable interest rates.

The best way by far to secure an auto loan with bad credit is by finding a reputable dealer with a strong lending network that specializes in consumers with bad credit histories. A dealer like Ride Time.

Ride Time maintains an extensive network of lenders in Canada who work with us to get you a great rate on a used car – regardless of your credit score. If you’ve had a job for 3 months, make $1500/mo before deductions, and have a valid driver’s license, we can help you secure a great loan on a fantastic car.

Your credit score isn’t everything at Ride Time. We believe in second chances. So log on to our website, take a look at our selection of high-quality pre-owned cars, and take the first step towards finding the car of your dreams – and rebuilding your credit.


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