For first-time borrowers with bad credit, obtaining a car loan can seem like a daunting task. Lenders use your credit history to determine how likely you are to pay back a loan. Some lenders may not want to loan you money if your credit reflects some financial bumps in the road — or if you have not had time to build a credit history.
However, it is possible to secure a car loan in Edmonton even if you have a less-than-perfect credit score. Here we will explore some broad tips and advice for first-time borrowers looking for bad credit car loans in Edmonton.
Determine Your Bad Credit Score
Before you start looking for car loans, it is important to check your credit score. Your credit score reflects your creditworthiness and will determine the interest rate you will pay on your car loan. A low credit score can result in a higher interest rate and, in turn, higher monthly payments. However, it is important to know where you stand before you start shopping for a car loan. Your credit score can also help set your expectations before you start looking for a loan. You can check your Equifax and TransUnion credit reports for free here.
Shop Around for the Best Deal
When you have bad credit, it’s especially important to shop around for the best car loan deal. Check with multiple lenders to find the best interest rates and loan terms. Make sure to compare both the interest rate and the length of the loan, as longer loan terms may result in lower monthly payments but may also result in paying more in interest over the life span of the loan.
Low credit car loan interest rates typically range between 9.90% and 29.99%. The interest rate you qualify for will be based on factors like your income, down payment, and credit score. Other factors that may impact your car finance interest rate are how much you need to borrow, the type of car you are buying, and how long you choose to repay the loan.
Save for a Down Payment
Saving for a down payment can help you secure a bad credit car loan in Edmonton. A down payment demonstrates to lenders that you are serious about making the loan payments and can help lower your monthly payments. A good rule of thumb is to set aside 10% to 20% of a car’s purchase price as a down payment. Consider your savings and monthly income and see how much you can feasibly set aside for a down payment. Additionally, a down payment can help you avoid a situation where you owe more on the car than it’s worth, which is known as being “upside down” on your loan.
Consider a Co-Signer
If you have a family member or friend with good credit, consider asking them to co-sign on your car loan. A co-signer can help you secure a loan with a lower interest rate and better loan terms. Keep in mind, however, that your co-signer will be equally responsible for the loan and their credit will be affected if you miss payments.
Choose the Right Car
Choosing the right car is important when you have bad credit. Avoid cars with high sticker prices, as they may be more difficult to finance. Additionally, consider choosing a used car or a certified pre-owned car to save money. Before you make a purchase, research the car’s reliability and repair costs to make sure it is a good investment.
Negotiate to Trade In your Car
Some dealerships allow you to trade in your current car for a new one even if you have a bad credit score. Your old vehicle’s value is appraised and subtracted from the market price of your new car. Trading in your old car will lower the amount you need to borrow, which could improve your chances of approval for financing with bad credit.
Features of bad credit car financing in Edmonton
Before you apply for any loan, especially a bad credit auto loan, apart from the steps mentioned above, it is important to find out as much as you can about the offer you are getting. Consider these factors before applying.
APR (annual percentage rate).
To get an idea of how much your loan is going to cost, look at the APR. The APR represents the annual cost of having the loan, including both interest and fees, and is the easiest way to make a quick comparison of car loans with the same terms. Bad credit auto loans tend to come with APRs as low as 10% and up to 30%.
Car loan terms for bad credit financing usually run between 2 and 7 years. A shorter loan term means you will pay less interest overall and get out of debt quicker – but your monthly payments will be bigger. A longer loan term will lower your monthly payment, but since there’s more time for interest to accumulate, you’ll pay more interest overall.
Bad credit loans often come with more fees than other types of auto financing. Some lenders charge a monthly account fee or administration fee, which can range from $10 to $20 per month. Many will also charge an origination fee, usually either 1% to 5% of the loan amount or a flat rate, when issuing your funds. Some loans also include early repayment fees if you pay the loan in full before the term date.
Does getting a loan help to improve your credit score?
Yes, it does. If you qualify for a loan with bad credit, you may be able to use it to help build your credit. You can start doing this by paying your loan payments on time. This will help you develop a record of a positive payment history, which is an important component of your credit scores. Late or missed payments can further damage your credit score and result in additional fees and penalties. Making your payments on time demonstrates to lenders that you are responsible and can help improve your credit score over time.
In conclusion, obtaining a bad credit car loan in Edmonton can be challenging, but it is not impossible. Compare your options to finance a car with bad credit and get pre-approval to narrow down the best deal. Before you sign on the dotted line, make sure you can afford the repayments and understand the total cost of your car loan.