Guide

Bad credit car finance

If you’re looking to buy a new car, but your credit score isn’t very good, there are still potential options out there for you.

Words by: First published: 25th January 2019
If you’re looking to make any big purchase in life, you won’t be able to escape talking about – and revealing – your credit score. The better your credit score is, the more likely is it that you will be approved for credit.

But not everyone has a great credit score. And while it can make things a bit more difficult when trying to buy a car, it doesn’t mean you won’t be able to.

It’s a good idea to check your credit score semi-regularly. There are three main companies in the UK where you can check your report: Experian, Equifax and Callcredit. Experian and Equifax both have reports that you can check for free for 30 days, before paying a monthly fee, and Callcredit is always free. Your credit report and score will give you a good indication as to what your chances are for getting accepted for finance.
What does your credit score measure, and why does a low one mean it’s harder to get finance?
Lenders use your credit report to measure how much of a risk you might pose i.e. whether you’ll be able to pay back the loan on time, or at all. All lenders interpret credit scores in different ways, so where one lender might offer you finance, another may not. Your credit score can also affect the interest rate at which a lender will offer you finance.

If you’ve got a poor credit history, generally that means you have a low credit score.

You might have a low credit score because of missed payments, or defaulting on repayment obligations, for example. Further down the line, struggling to repay debt could lead to County Court Judgements (a court order that enables a lender to start doorstop debt collection), Individual Voluntary Arrangements (a formal agreement between you and a lender to pay back a certain amount of money over a few years, and then write off the rest of the debt), or bankruptcy.

You could also have a low credit score if you’ve never borrowed money before, as there’s nothing for a lender to base a credit decision on.

There are lots of things that affect your credit score. Paying bills on time can improve your score, but late or missed payments may negatively affect it, for example.

It does take time to improve your score though, so if you’re looking for a new car now, what are your options?
Even if your credit score isn’t particularly high, there are still possible options to look at if you’re looking for car finance, but remember to think about whether you can afford the monthly repayments, now and in the future.
Hire purchase agreement
While most car finance is through PCP, there is still the option of HP, or hire purchase. A Hire Purchase agreement is usually arranged through the dealer you’re buying the car from. You put down a deposit – which you can stump up yourself or can often be covered by part-exchanging your current car – then you pay off the rest of the outstanding balance via monthly payments over a set period of years. You can pay a larger initial deposit, or spread the cost over a longer period with a smaller deposit.

The monthly payments are generally higher than with other forms of car finance, but if you can’t keep up with the payments, the finance company can repossess the car, so it’s less of a risk to them.
Non-status lease
A non-status lease is a bit like PCP. After paying an initial deposit, you pay monthly payments. At the end of the term, you can either give the car back and walk away, get a new car, or pay a lump sum and own the car outright.

However, the lease doesn’t make your credit history the main factor when deciding whether or not to give you the finance. The lender or car dealership will look at your overall circumstances. As this is a relatively high-risk form of finance, monthly payments can be more expensive than with other types of finance.
Secured personal loan
A secured personal loan isn’t specifically for car finance, but it is an option if you need finance for a car. The loan money is guaranteed by something valuable you own, such as your house. However, if you miss repayments, the lender can take away your valuable asset, so you need to think very carefully about that risk, and whether you’ll be able to make your monthly payments.
Guarantor loan
Guarantor loans also aren’t specific to car finance. With this type of loan, a relative or friend co-signs the agreement. In this case, if you can’t meet the repayments, your guarantor will have to pay for you. They may also have to secure the loan against something valuable of theirs.
Applying for bad credit car finance
When you apply for credit, lenders will check your credit report using a ‘hard search’. If several of these ‘hard searches’ are recorded in a short space of time, it can negatively affect your credit score, because it might look like you really need the credit. Therefore, think carefully before applying to several different places in a short-time frame.

It’s worth having more casual conversations with a few different lenders when you’re first looking, to find out your options and see if there’s something out there that can work for you.

Before applying for a loan, you can check your eligibility using a ‘soft search’, which won’t negatively affect your credit score. These checks show you how likely it is that you will be accepted for the loan you’re applying for.
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