Getting a car can be expensive; sometimes, we need to borrow money to make it happen. But what if your credit isn't perfect? That's where bad credit car loans come in. Let's talk about what they are and what you should watch out for.
Understanding Credit Scores in Canada
In Canada, two main companies, Equifax and Transunion, keep track of how you handle money. They give you a number called a credit score, which ranges from 300 to 900. The higher the number, the better you've been with your money.
Here's how they break it down:
- 760 or more: Excellent
- 725-759: Very good
- 660-724: Good
- 560-660: Acceptable
- Less than 560: Not so good
They look at five things to figure out your score:
- Payment history (35%):This is all about how you've been with paying your bills and debts.
- Used credit versus available credit (30%): They check how much of the money available to you, like on credit cards, you've actually used.
- Length of credit history (15%): The longer you've been good with credit, the better.
- Public record (10%):This includes things like bankruptcy, which can hurt your score.
- Credit inquiries (10%): When you ask for a new loan, they look into your credit. Too many of these can be bad for your score.
Why Bad Credit Means Higher Costs
If your credit score isn't great, it can make getting a loan for a car more expensive. This is because the bank thinks there's a bigger chance you might not pay them back. So, they raise the interest rate, which makes your monthly payments and the total amount you pay for the car higher.
Typical Interest Rates for Bad Credit Car Loans
Usually, people in Canada can expect to pay around 4.5-10% interest on a car loan. The better your credit, the lower the interest. If your credit isn't so good, you might end up with a higher interest rate, like 10-30%.
To show you the difference, let's say you have a $20,000 car loan for 60 months:
- Good credit (4.5% interest): $372.86 per month, $2,371.62 in total interest.
- Not-so-good credit (15% interest): $424.94 per month, $5,496.45 in total interest.
As you can see, bad credit can significantly affect how much you pay.
Watch Out for Predatory Lending
Some lenders might try to take advantage of you if you don't have great credit. Here are some tricks to look out for:
Bait and switch: They promise one thing but give you something worse when you sign the papers.
Hidden fees: They don't tell you about all the costs, so you end up with a bad deal.
Adding extras: They might include things you don't need or didn't agree to.
Balloon payments: They might hide a big final payment that can really catch you off guard.
Rebuilding Your Credit
Bad credit doesn't have to last forever. You can work on it! Here are some ways:
Credit-builder loans: These can help you build up your credit slowly.
Secured credit cards: They're a safe way to use credit and improve your score.
Debt consolidation: This helps you manage your debts better.
Getting the right car loan and making timely payments can also boost your credit. Once your credit is better, you might be able to get a new loan with a lower interest rate.
Auto Approvers is a trusted choice if you're in London, Ontario and need help with bad credit car loans.
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