If you have bad credit and want to get a car loan, this could be the most valuable article you will read.
There is a ton of bad information out there when it comes to buying a car in general – especially if you have less than perfect credit. I wrote this article to set the record straight.
First off, your credit score does not mean very much to the banks. I have seen consumers with a 500 credit score get approved prime (lowest interest rate) and people with a 780 credit score get flat out declined.
Instead of your credit score, banks are more concerned with how you handle your debt load. Here are some of the factors banks heavily take into consideration.
1) Credit Utilization
Credit utilization is the ratio of your outstanding credit card balances to your credit card limits. It measures the amount of your credit limit that’s being used. For example, if your balance is $300 and your credit limit is $1,000, then your credit utilization for that credit card is 30 percent.
Someone who is 100% utilized (or close to), could be having financial struggles and may not be able to take on more debt. Now, if you have a $1,000 credit card and the balance is $1,000, although you are 100% utilized, it’s not a significant amount of credit so it won’t affect things as much.
The worst thing is to be over 100% utilization. Most credit cards allow you to go a few hundred dollars over the limit. This can put you at 110%, 120% etc.
If a bank sees you over 100% utilization, they will in almost all cases decline you.
Make sure to at least pay your credit cards down to under the balances before going to get a loan. (it can take up to 30 days for this to report to the credit bureaus)
2) TDSR – Total Debt Service Ratio
Your TDSR is your total amount of financial obligations divided by your total gross income. For example, if your total gross income was $10,000 and your total financial obligations (rent/mortgage, credit card payments, cell phone bill, utilities, personal loads, student loans etc.) is $5,000 – your TDSR would be 50%
As a general rule, banks like to see your TDSR no higher than 40% (they will make exceptions in some cases)
To calculate your TDSR, pull a free credit report (using Credit Karma or another service) and calculate the minimum payments of everything that is reporting. For example – if you credit card has an outstanding balance of $10,000 but the minimum payment is $150, use the $150 payment towards your TDSR.
Write our all of your obligations (including rent/mortgage) and use $400 for groceries and other expenses.
Divide this number by your total gross income (before taxes and other deductions) and this will give you your TDSR.
If this number is above 40%, you may have issues getting a car loan and will need to find ways to lower your financial obligations (pay off cards, get a roommate to share the rent, credit consolidation etc.)
3) Past Due on loans/credit
If you are past due on your credit cards or loans (especially a car loan) this raises significant red flags to the banks as it shows you are currently struggling. They are unlikely to lend you any more money as if shows you can’t handle your current obligations and won’t be able to handle any more payments.
Before you apply for a loan, make sure you are all caught up on your payments (especially car loan).
If you can make sure those 3 things are in check, your chances of getting a car loan are very high. Lots of Canadians have previous missed payments and collections, but if everything else is in check, the banks can usually look past those.
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