Bad Credit Auto Loans

In Canada there are many types of consumer credit and even more degrees of credit history. Having such a large spectrum of credit in Canada can make defining bad credit difficult. There are, of course, fundamental credit scenarios that are almost always considered bad credit or poor credit. The Bad Credit Auto Loans lens details typical bad credit scenarios in Canada.

Bad credit can best be described as poorly paid credit that is visible on consumer credit bureaus. In Canada there are two credit bureaus: Equifax and TransUnion.

All major banks and finance companies in Canada report loans to both credit bureaus. A loan that is visible on a consumer credit bureau is referred to as a credit trade line.

There are two types of trade lines: Instalment Loans and Revolving Loans.

Instalment Loans

Instalment loans have a regular fixed payment. Examples include a mortgage payment or auto loan payment. An instalment loan requires that a regular instalment (loan payment) be made on time, usually once a month. Every instalment paid by the consumer contributes to reducing the overall loan balance.

Once the final loan instalment is paid the loan is considered complete. For an auto loan paying the final instalment means total ownership and no further obligations to the creditor. This process also applies to mortgage payments.

Revolving Loan

Revolving credit is very different from instalment credit. While an instalment loan presents the debtor with a loan balance to be paid off, a revolving loan does not. Instead of a loan balance to be paid, a revolving loan grants the consumer a credit limit.

A revolving loan is a credit allowance with a credit limit. Instead of a large fixed loan amount, the consumer is given flexibility and control over the size of the loan (within the credit limit of course). Examples of revolving credit include line of credit loans and credit cards.

Because revolving credit consists of the debtor being granted a high credit limit, the loan payments can vary in size. If the credit card owner never uses their credit card, then their monthly payment will be $0. If they use their credit card their minimum monthly payment can vary. In Canada most credit cards require a minimum monthly payment equal to 3% of the credit card balance.

Any type of loan can go into default, not just instalment or revolving loans. If a consumer is not meeting the terms of their loan, then they are in default. Here are some specific examples of loans in default (bad credit).

Past Due Payments (late payment & poor credit)

Every loan payment has a due date. It's common for a loan to have a monthly due date but that's not always the case. Sometimes loan payments are required weekly, bi weekly or even semi monthly. No matter when your payment is due, it's important to understand that your credit obligation requires you to pay it on time, every time. If a loan payment is late by even 1 day it is considered past due and you are in default of your loan agreement. Fortunately being a day or two late on a payment is not a disaster.

Because life happens and payments occasionally need to be rescheduled most finance companies will grant the debtor some slack. There are also industry wide practices that prohibit creditors from reporting minor delinquency to the credit bureau. If you are late on a payment less than 30 days, then it will not report to the credit bureau and your credit rating will not be impacted.

While not chasing after their clients for being a couple days late is a nice touch, most finance companies will still charge late fees or per diem interest charges. So keeping your payments a couple days late might not hurt your credit rating, it can hurt your wallet.

30 Days Late Credit

If you're in arrears on any trade line 30 days or longer your late payment will be reported to the credit bureau. This is a classic example of a slow payment history affecting and damaging credit. If a creditor reports a payment late by 30-59 days then the credit bureau will list that payment as either I2 or R2 (I=Instalment Loan R=Revolving Loan).

While a single I2 or R2 isn't necessarily a sign of bad credit, having multiple payments 30+ days late is. If you suspect your late payment is approaching 30 days past due, you should get ahead of the problem and contact your creditor. In some cases they can offer you a payment extension or arrange a new payment schedule.

Credit 60 Days Past Due

If you cannot bring your late payments up to date and you reach 60 days past due your credit rating will report as I3 or R3. A 60 days plus account is considered severely past due and will adversely affect your credit. At the 60 days late junction the debtor is likely receiving regular collection calls, past due notices in the mail and in the case of an auto loan at risk of vehicle repossession. Collection calls or a repo are serious situations and should be treated as such.

Loan Payments are Late 90 days

If a late payment reaches 90 days past due then the credit bureau will report that trade line as I4 or R4. At this stage a vehicle might have been repossessed, a bailiff might be looking for the vehicle or if the loan is a revolving loan the creditor might be preparing to write off the loan as bad debt. A loan 90 days past due is a severe case of bad credit and will certainly have a negative impact on your credit rating as well as your chances of being approved for other loans.

Credit is 120 Days Late

If a revolving credit trade line is 120 days or more past due then it will be soon be written off as bad debt. A revolving loan at 120 days late will report as R5 on a credit bureau.

An instalment loan that reaches 120 days late will report to the credit bureau as I5. An I5 loan depending on the loan type will soon be written off as bad debt, repossessed or foreclosed.

Unless you are working with a Special Finance company that deals with bad credit loans or subprime auto loans it is virtually impossible to get approved for a new loan with an I5 or R5 reporting on your credit bureau. 120 days past due is considered very bad credit and is an example of a debtor severely struggling with their credit.

Write Off Credit

Once a loan is written off the credit bureau will report the loan as either I9 or R9. After the loan is written off the bad debt will often be sold to a third party collection agency. Once the agency purchases the bad debt, their collectors will begin to contact the debtor via collection calls, past due notices and occasionally personal visits. The collection agency will continue to contact the debtor until the debt has been paid back in full, a settlement is reached or the debtor files bankruptcy.

A written off loan will show on a credit bureau and is considered extremely bad credit. Although there are situations where a write off could be for a very small amount or be the result of a misunderstanding, it will still have a negative impact on the debtors creditor bureau.

If you're not going to file bankruptcy and include the write off in your bankruptcy, then the best way to recover from a written off loan is to contact the debtor or the collection agency and settle. If you pay back a written off loan, it will report as account paid on your credit bureau and contribute to the overall credit repairing process.

Collections

What is a collection? When it comes to bad credit there are two types of collections. While a collection call is the first thing that comes to mind, the term collection also refers to a credit bureau collection.

Credit Bureau Collection

If you do not pay back debt you owe then a creditor can file a collection against your credit bureau. Filing a collection is essentially the creditor taking your bad credit or unpaid debt and marking you with it. There are a few situations where a creditor might file a collection against you and your credit bureau.

Written off credit collections are filed after a creditor has written off unpaid debt. The creditor at this stage may file a collection against your credit bureau themselves or sell the collection to a third party collection agency. In either situation the debtor's credit bureau will end up marked with a collection in the COLLECTION or COLLECTION ACCOUNTS section of their credit bureau.

Another situation where a collection can be filed against a consumer is non payment of a non trade line loan. What does that mean? It means a company that does not report to the credit bureau can file a collection against their defaulting customer.

In Canada there are several types of business and companies that although they don't report as trade lines on a credit bureau, can still file a consumer collection.

Examples in Canada include cell phone or cable providers such as Rogers Communications or Bell, video rental stores such as Blockbuster and Rogers Video or fitness centers such as Goodlife Fitness. Even a doctor or dentist can file a collection for non payment.

Although there are no certainties, its common for a smaller collection such as a Rogers Video collection to be less damaging to your credit bureau than a large collection such as an auto loan write off.

Collection Calls

Collection calls, along with auto loan repossession, are probably the best known and most referenced aspect of bad credit. If you've ever read a book or seen a movie with a character that has bad credit or late payments, chances are you also saw that character get a collection call.

There is a reason why collection calls come to mind when someone thinks of bad credit. Collection calls are common! If you're late on a car loan, behind on your mortgage or you missed a credit card payment - you will get a phone call!

What's the best way to avoid collection calls? Obviously pay your auto loan or credit card on time. If that isn't possible then pre-empting or answering a collection call and making payment arrangements is the next best thing. Most collectors will respond better and work closer with debtors if they are willing to speak to them about their late payments.

Auto Loan Repo Credit

Auto loans are often a necessity in life. After all, most people cannot afford to buy a car with cash. That single fact contributes to thousands of auto loans being approved every month in Canada.

With so many auto loans being approved and financed in Canada, it's not a surprise that many of these car loans end up being paid late or worse. In fact auto loan delinquency is quite common. This is one of reasons why the word repo is almost always associated with a car loan.

Just like a mortgage or a credit card, there are many types of auto loans. There are auto leases, auto finance loans, balloon auto loans and of court auto rentals. The most common type of auto loan is the traditional instalment auto loan.

Almost all auto loans report to the credit bureau as an instalment loan. Their status, just like other instalment loans is preceded by the letter I and can be accompanied by various numbers depending on its credit rating. If an auto loan is reporting as I2 then its at least 30 days past due and considered delinquent.

In most I2 situations the creditor is not considering vehicle repossession but they are actively trying to contact their customer and have them catch up on their car payments. Once a consumer's auto loan reaches the I3 stage, the situation becomes quite serious and depending on the auto loan lender repossession might occur.

If an auto finance company must repossess a vehicle they may offer their customer a chance to redeem the auto loan, demand a full auto loan payout or choose to sell the repossessed vehicle at auction. Although selling the vehicle at auction almost always causes the finance company to lose money, it is the most common scenario.

Auto Finance Write Off

What happens if a debtor who has paid off most of their auto loan falls behind on their car payments? Depending on the finance company, the province and the remaining auto loan balance the answer can vary.

If a consumer with an auto loan has paid off most (some scenarios most equals two thirds of the auto loan) of their auto loan (auto finance not auto lease) then the finance company can

What is Bankruptcy?

In Canada bankruptcy is a form of financial protection that both businesses and individuals can use to absolve debt. Filing bankruptcy is usually a last resort used to wipe out debt and start over fresh. In Canada both consumers and business can file bankruptcy protection. The bankruptcy definition on this Bad Credit Auto Loans lens is only for consumer bankruptcies in Canada.

Although bankruptcy can offer protection from creditors, free up debt and grant a fresh financial start, there is still a negative side to it. Bankruptcy is often considered bad credit and can be associated with financial weakness. Since bankruptcy is often considered a bad thing, many people assume it will ruin them or choose to unfairly judge those that file.

Although a poorly timed or unnecessary bankruptcy can be a bad decision it's important to remember that bankruptcy done right can be a good thing.

Why File Bankruptcy?

Why do people file bankruptcy? Most bankrupts file bankruptcy because they are struggling with their debt, bills or other credit obligations.

Because filing bankruptcy is a last resort an individual might struggle thru several stages of bad credit before they file.

Pre-bankruptcy bad credit might include missing loan payments, writing off loans, skipped payments or auto loan repossession.

Bankruptcy doesn't always come after bad credit or a poor payment history, sometimes bankruptcy is filed amidst great credit conditions. Sometimes a sudden change in a person's financial situation such as job loss or illness can result in bankruptcy.

Although struggling with bad credit or experiencing a major financial change are two common reasons people file bankruptcy, they are not the only reasons. Before you consider filing bankruptcy please make sure it's the best choice for you and your situation.

Always contact a qualified trustee in bankruptcy or insolvency lawyer before you make a major bankruptcy or consumer proposal decision.

How Does Bankruptcy Affect Credit History?

Just like credit cards, auto loan payments and other loans, bankruptcies report to the credit bureau and are recorded as part of your credit history. If you're in bankruptcy or you've had a past bankruptcy it will be disclosed to anyone reviewing your credit bureau.

A bankruptcy will remain on your credit history for 6-7 years after it's been discharged. During that 6-7 year period any bank or finance company that pulls your credit bureau will have access to your bankruptcy information. In many cases that can affect your chances of being approved for loans.

The size of bankruptcy, numbers of bankruptcies, length of a bankruptcy (a first time bankruptcy in Canada usually lasts 9 months) and bankruptcy payment history are all factors considered by banks when reviewing credit applications for credit cards, mortgages, personal loans and auto loans.

Bankruptcy Auto Loans

A lot of people think filing bankruptcy means they can't apply for a loan, get a credit card or finance an auto loan. While bankruptcy does make getting a car loan difficult, it doesn't make it impossible.

If you're in bankruptcy banks and finance institutions may consider your credit high risk and decline your credit application. The same goes for after bankruptcy auto loan applications. For many finance institutions a bankrupt or previously bankrupt customer is just too high a risk to take.

Fortunately there are special finance banks and car dealerships in Canada that service a range of high risk products including bankrupt auto loans, bad credit car loans and after bankruptcy auto loans.

Get Approved on a Bankruptcy Auto Loan

If you're bankrupt and looking for an auto loan you should focus on two things:

1) Be prepared for a bankrupt auto loan: Ask yourself if you can afford both a bankruptcy and an auto loan payment every month. The most important job of a bankrupt is to successfully complete bankruptcy and start fresh so they can repair their bad credit.

2) Find a Special Finance dealership: Before you put your personal credit history and bankruptcy information into another person's hands, make sure they know what they are doing. Hundreds of car dealerships in Canada claim to get anyone approved for an auto loan no matter how bad their credit is, but only a handful are truly experts. Bankruptcy and bad credit are both very personal and serious situations that should only be handled by a professional.

If you're in bankruptcy and you're ready for an auto loan don't be discouraged. Plenty of car dealerships and auto finance companies in Canada are ready to help you get approved for a bankruptcy auto loan.

Even if you have bad credit you can get approved for an auto loan. Every day Canadians in bankruptcy or with bad credit get approved for car loans. If you have bad credit and you're ready for an auto loan, then these three steps might help you get approved:

Qualify for a Bad Credit Auto Loan

First find out if you qualify for a bad credit auto loan. To do this you need to consider the most basic aspects of an auto loan: car payment, affordability and necessity.

Car Payment - If you are going to pay for an auto loan, then you'll need a source of income. If you do not have a job or a regular source of income (such as Canadian Pension Plan or Permanent Disability) then you shouldn't be looking for an auto loan.

Affordability - Having a source of income is always required when applying for an auto loan and so is having enough income. If you are making $1000 a month, then you cannot afford an auto loan. If you're making at least $2000 in gross income, then you might be able to afford a car payment. Realistically, anyone with income less than $2000 a month could struggle making even a small car payment.

Necessity - Do you need a car loan? Are you looking for an auto loan because you're bored with your current vehicle? If you have bad credit and a working, safe vehicle, then getting a new car loan might not be the most responsible decision. Yes a well paid bad credit car loan can repair your credit but you should only consider getting an auto loan if you need one or can afford one.

Find a Special Finance Car Dealership

If you have bad credit and you visit the wrong car dealership, you might be told "you can't get approved", "your credit is too bad" or worse you might be treated unfairly and made to feel bad about your credit history. Unprofessional or unqualified car dealerships can waste your time, insult you or further damage your credit history.

One of the most important steps in getting approved for a bad credit auto loan is choosing a qualified, respectful and knowledgeable car dealership. When you look for a car dealership, don't just look for a car you like, look for a dealership that understands Special Finance and bad credit.

Get Approved

The final step in finding a bankrupt auto loan, after bankruptcy car loan or bad credit auto loan is the easiest. Get approved!

If you meet the minimum requirements for an auto loan (you have a regular source of income, you can afford a car payment and your credit history fits within the requirements) and you've chosen a qualified car dealer, then getting approved for an auto loan is easy!

Remember to always choose to get an auto loan for the right reasons and to find a knowledgeable car dealer you can trust. Good Luck!