For many people, a car is an absolute necessity. Whether you need it to drop the kids off at school or your job requires a car, having one can make an enormous difference in your life. Unfortunately, cars are not cheap.
In Canada, there are several ways that you can finance a car, including taking out a car loan. Like any personal loan, a car loan is a sum of money lent to you to pay for a car.
If you’re thinking of buying a car using a car loan, then you’ve probably found that there are a few kinds of auto loans you can apply for. In this article, we will explore the different types of auto loans you can get and how they differ from each other.
What is a Traditional Auto Loan?
The most common kind of auto financing available in Canada is the traditional auto loan. This loan comes from major banks and credit unions. To get approved for a loan with a traditional lender, a borrower needs to meet a set of requirements, including having a good credit score.
Traditional auto loans tend to have lower interest rates and more flexible repayment terms than other kinds of financing solutions.
While traditional auto loans are a sensible way to finance a new car, some people’s financial situations may not allow them to get approved for a traditional car loan. Fortunately, there is another kind of vehicle loan available.
What is a Bad Credit Auto Loan?
For those who have a poor credit report or a difficult financial history, a bad credit car loan could be the solution to financing a new vehicle. If you apply for a car loan with bad credit at a traditional financial institution, you are likely to be rejected. However, specialized lenders across Canada will still offer car loans despite bad credit scores.
These lenders have a distinct set of requirements that don’t include a good credit history. Instead, you will likely need to show that you have a stable monthly income and can meet the repayments required for the loan amount.
You may find that the interest rates for bad credit car loans are higher than traditional ones. You may also find that your loan term is longer. Be aware of lenders and dealerships who try to take advantage of you.
Some lenders may make you feel like they are your only option, so ensure you shop around and get a good view of all the options out there. Don’t get locked into lengthy loan terms or extortionate interest rates because you feel you have no other option.
Key Differences Between Traditional and Bad Credit Car Loans
If this all seems a little confusing, we’re right there with you. The number of auto financing solutions on the market in Canada can make the choice pretty overwhelming, so we have broken it down for you.
Below, we’ve explored the key differences between a traditional auto loan and a bad credit car loan to help you better understand both options.
Credit Score
First and foremost, the key difference between the two kinds of loans is that one requires a good credit score, and the other doesn’t.
As the name suggests, bad credit car loans can be taken out by people who have a poor credit history or blemishes on their credit reports. It means that even if you have a bad credit score, you can still have access to a vehicle if you need it.
Along with this, a bad credit car loan can actually help people with poor credit improve their credit scores. With regular monthly payments, individuals with poor credit can slowly improve their credit while paying off a bad credit car loan.
While you may want to try, it is difficult to qualify for a car loan with bad credit at a traditional institution. Instead, consider whether there is time for you to improve your credit score before applying. Or consider a specialized lender that offers bad credit car loans.
Interest Rates
Bad credit car loans are riskier for the lender. A credit score tells a lender how likely an individual is to default on a loan or miss repayments. So, by solely working with people with poor credit, these specialized lenders are taking on more risk than traditional ones.
This, unfortunately, means that interest rates are likely to be higher for bad credit car loans. In fact, estimates vary, but most suggest interest rates will be in excess of 7% and up to 20% for bad credit car loans.
You can get lower interest rates if you’re applying with a stable income. You may also reduce interest by applying with a cosigner or a large down payment.
Financial Institutions
Lastly, while you can get auto financing from most major banks and credit unions, you will find that bad credit car loan lenders tend to be online lenders or specialized dealerships. If you have good credit, you can get pre-approved and apply to your own bank to make things simpler.
For those with bad credit, it is best to shop around local dealerships and online lenders to find the best terms and interest rates.
Which Car Loan is Right For Me?
The best car loan for you comes down to your personal financial situation. If you’re in a good place with your finances and have good credit, you can apply for a traditional loan with a bank or credit union. You can also work with your local dealership if their terms meet your requirements.
For people with bad credit, bad credit car loans are usually the best option. They can provide you with the means to finance a car when you need it, and they give you the ability to improve your credit score.
Work with your lender to find the right balance between loan term length and interest rates, and see the loan as a means to an end. Once you’ve paid it off, you will own your car and can apply for traditional loans with lower interest rates once your credit has improved.
Final Thoughts
With many types of auto financing out there, it can feel stressful trying to find the best type for your situation. For people with bad credit, a bad credit car loan is a good choice. It offers the chance to improve your credit and gives you equity in your car once you’ve paid off the loan.
If you’re looking for a bad credit loan in Ontario, then Car Loan Masters can help. We’re a specialized lender working with people with poor credit to help them get the financing they need. Our team has lots of experience assisting people with financing their vehicles, and we can support you through the entire process.
Get in contact with our team today and find out more about our loans.