Financing a car with good or bad credit

Here’s what you need to know before you borrow to buy a new vehicle.

Once you’ve chosen a new or used vehicle you need to look at how you’re going to pay for it. For most people it’s by obtaining a loan. This article will focus on financing the vehicle rather than leasing or using a credit line (which is almost never a good idea).

When a lender is deciding if they will offer you a loan (and at what interest rate) they look at your credit report. In Canada there are two main credit bureaus, Equifax and Transunion. These credit bureaus give you a credit score based on your past willingness and ability to pay your bills, usually between 300 and 800. While repeated and continual “hits” on or checks of your credit bureau can also affect your credit rating, having several hits in a row only periodically will not. These bureaus know that you are shopping for the best deal and take this into account.

Some auto manufacturers have a finance arm that offers loans. Ford Credit, Chrysler Capital, Honda Finance, or GMAC are examples of this. These finance companies may also lend money on other makes or used vehicles also.

Sometimes a manufacturer will offer zero per cent financing. Since no one actually lends money for free it’s important to understand that this is just a form of discount on the vehicle. The manufacturer is paying the interest to the finance arm instead of offering a discount. Sometimes in lieu of the zero per cent financing you can opt to take a discount for paying cash or for financing through other institutions. If this is the case, have the finance manager work out the numbers both ways for you to see which offers the lowest payment over the same term. Sometimes paying a higher interest rate and taking the discount ends up being a better deal.

Canadian chartered banks also have automotive finance arms that offer car loans. You can’t actually walk into these offices as they are only available to dealers online. The dealer submits the application for you and does the paperwork for these loans.

The Finance Manager at your dealership may send your application to several banks looking for the best deal.

You could also walk into your bank and look at getting a personal or collateral loan from your branch. However it would be much easier to have the finance office at your dealership to arrange a car loan.

There are also other lending institutions that specialize in special finance or sub-prime (having a credit score below 550 is often considered sub-prime) automotive loans. These companies will help people who have had some bad luck or made some bad decisions that have affected their credit. These loans are considered higher risk and so will have higher interest rates. They can be as high as almost 30 per cent. While this rate may seem ridiculous it could be the only choice for some people. It’s the penalty you pay for past credit issues. Accepting this rate will get you a vehicle and can greatly improve your credit if all payments are made on time. Sometimes even within a year you can get a new loan at a substantially lower interest rate.

But there’s no guarantee this will happen. There are many variables to credit scores. Just paying your new car loan on time won’t help your credit if other loans are not also paid on time. Sometimes having additional credit, like making credit card payments on time, may be necessary to improve your credit. If someone tells you that you are guaranteed to get a better rate within a certain period of time, with just this new car loan, they are being disingenuous.

There are numerous ads on the internet and Facebook offering good credit/bad credit car loans. Sometimes these ads are dealerships advertising for new customers and sometimes these ads are companies that take your information and sell it as a lead to dealers looking for new customers.

Either way, your information is being checked at the same credit bureaus and going to the same lenders for approvals. Every one of these lead companies and every dealer should have access to the exact same lenders, so one really has no advantage over the other. If you’re worried about your credit, rather than sending your personal information over the internet to people you don’t know, sit down with your favourite dealer first and look at your options. You can always opt to try other avenues later.

Most dealers will have an option on their website to get pre-approved or you can just sit down with the finance manager at your favorite dealership before choosing a vehicle and get pre-approved. That way you know how much you would be approved for and won’t be disappointed if you picked out a nice vehicle and then couldn’t get financing for it.

Catch Driving with Jens on CHON FM Thursdays at 8:15. If you have any questions or comments you can reach out to Jens Nielsen at drivingwithjens@gmail.com, Facebook or Twitter: @drivingwithjens.