Canada's Trusted Bad Credit Car Loan Resource

Get started in 3 minutes with good, bad, or no credit.

Payment Shopping and Bad Credit Auto Loans

When financing a car, most consumers focus on the monthly payment instead of the interest rate or total cost. This is why the industry has seen loan terms increase and monthly payments decrease in recent years. However, this "payment shopping" point of view can be dangerous for borrowers with poor credit.

Auto Financing with Poor Credit

Payment Shopping

If you need to finance a car with damaged credit, it is certainly possible. There are lenders who will accommodate people with less than perfect credit. Instead of focusing on just your credit score, they will consider additional factors. These include your income, recurring debt, employment and residence history.

Bad credit car loans can be extremely helpful. You can get the vehicle you need and you can also rebuild your credit with every timely loan payment. However, there is a trade off. Subprime lenders charge higher interest rates on average to compensate for the additional risk. And this is the main reason why payment shopping represents trouble for poor credit borrowers.

The Dangers of Payment Shopping

A trend has emerged in the world of auto finance in recent years. The cost of vehicles continues to rise, while employee wages have remained relatively stagnant. In an effort to make loan payments more affordable, consumers started extending their terms.

Extending the length of a loan means you get a lower monthly payment. But, it also increases the amount you end up paying in interest charges. For people with better credit, payment shopping allows them to affordably finance a more expensive vehicle. But because interest rates are higher on bad credit auto loans, payment shopping can lead to trouble.

Bad credit borrowers, especially those who are on a tight budget, need to be careful. A payment shopping mentality is very short-sighted. It decreases the loan payment each month, but it ends up making the total cost of the loan higher due to interest charges. Extending a loan term is also riskier because it means you are locked into an agreement for longer and makes it much more likely that you are upside down on the car longer.

Best Practices

Therefore, when you need to finance a car with imperfect credit, it's best to not extend the loan term longer than you need to. A good rule of thumb: if you cannot afford the payment on a 48-60 month loan term, you probably can't afford the vehicle. Extending the term only increases risk and makes it more expensive overall.

Instead of engaging in "payment shopping," you should focus on rebuilding your credit as you pay back your loan. These bad credit financing tips will help you accomplish this:

  • Finance a lower priced vehicle - A more affordable vehicle option is your best choice when you have poor credit. Paying off the loan will help you improve your credit, and this can be done sooner with a lower priced car.
  • Keep the term as short as you can afford - You can manage the total cost of the loan and save on interest with a shorter loan term. We would recommend nothing more than 48 months. If you sit down and crunch the numbers on the total cost of a 36-month loan compared to a 72-month one, you'll see what we mean.
  • Try to save up for a down payment - Paying money down comes with a lot of benefits. Most notably, it reduces the amount of the loan, which means lower monthly payments. Or, it could mean a shorter term is more doable. Also, a smaller loan means lower interest charges. The more you can save up as a down payment, the more manageable you are making the loan.

A Final Tip

Not every lender or dealership is able to accommodate people with poor credit. If you are struggling to find auto financing approval, Canada Auto Loan is here to help. We work with dealerships across the country that specialize in helping people with imperfect credit.

We can help you out next if you simply complete our free and secure online application. Then, you can get the car you need, avoid the pitfalls of payment shopping, and be on the road to rebuilding your credit.