If you have bad credit, getting car finance can be a challenge. Many lenders may reject your application outright or offer you unfavorable terms that make it difficult to afford a car. However, there are still options available for people with bad credit who need to finance a vehicle. In this post, we’ll cover what car finance is, how bad credit affects your options, and what steps you can take to improve your chances of getting approved for car finance in the UK.
What is Car Finance?
Car finance refers to any type of loan or credit agreement that is used to buy a vehicle. It allows you to spread the cost of the car over a period of time, typically several years, rather than paying for it upfront. There are several types of car finance available, including hire purchase (HP), personal contract purchase (PCP), and personal loans.
HP finance is a type of car finance where you pay a deposit upfront, and then make regular payments over a set period of time. At the end of the agreement, you own the car outright. PCP finance is similar, but you have the option to return the car at the end of the agreement or make a final payment to buy it outright. Personal loans are another option, where you borrow a lump sum of money to buy a car, and then pay it back over a set period of time.
How Does Bad Credit Affect Car Finance?
When you apply for car finance, the lender will check your credit score and credit history to assess the risk of lending to you. If you have bad credit, meaning a low credit score or a history of missed or late payments, you may be seen as a higher-risk borrower. This means that lenders may be less likely to approve your application, or may offer you higher interest rates and less favorable terms. There are several reasons why someone may end up with a poor credit score, outlined below.
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Common Reasons for a Poor Credit Score
- Late or Missed Payments: Late or missed payments on credit cards, loans, or other bills can have a negative impact on your credit score. Even a single missed payment can stay on your credit report for up to seven years and can lower your credit score significantly.
- High Levels of Debt: Having high levels of debt, particularly credit card debt, can also lower your credit score. This is because lenders may see you as a higher-risk borrower, as you may struggle to make repayments on your existing debts.
- Defaulting on Loans: If you default on a loan, such as a car loan or personal loan, it can have a significant impact on your credit score. Defaults can stay on your credit report for up to seven years and can make it more difficult to get approved for credit in the future.
- Bankruptcy: Filing for bankruptcy is a serious financial decision that can have long-lasting consequences for your credit score. Bankruptcy can stay on your credit report for up to ten years and can make it difficult to get approved for credit in the future.
- Identity Theft: If you are a victim of identity theft, it can negatively impact your credit score. This is because the identity thief may open accounts in your name and make late or missed payments, which can lower your credit score.
- Applying for Multiple Credit Products: Applying for multiple credit products, such as credit cards, loans, or store cards, in a short period of time can also lower your credit score. This is because it can make you look like a higher-risk borrower, as lenders may see you as desperate for credit.
- Lack of Credit History: If you have a limited credit history, it can make it more difficult to get approved for credit. Lenders like to see a track record of responsible borrowing and repayment, and if you don’t have this, they may be less likely to lend to you or may offer you less favorable terms.
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However, having bad credit doesn’t mean that you can’t get car finance. There are specialist lenders who offer car finance for people with bad credit, but you should be aware that the interest rates and fees may be higher than for those with good credit. You may also be required to put down a larger deposit or have a guarantor, who agrees to take on the repayments if you are unable to.
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How to Improve Your Chances of Getting Approved for Car Finance
If you have bad credit and are looking to get approved for car finance, there are several steps you can take to improve your chances:
- Check Your Credit Score: Before applying for car finance, check your credit score and credit report to see where you stand. You can do this for free with several credit reference agencies, including Experian, Equifax, and TransUnion. If you spot any errors or inaccuracies in your report, you should dispute them to have them corrected.
- Consider a Guarantor: If you are struggling to get approved for car finance on your own, consider asking a family member or friend to act as a guarantor. This means that they agree to take on the repayments if you are unable to. However, they should be aware that this is a serious commitment and could affect their own credit rating if you default on the loan.
- Save for a Larger Deposit: If you can afford to, save up for a larger deposit to put down on the car. This will reduce the amount you need to borrow and may make you a more attractive borrower to lenders. It may also help you to get a lower interest rate and more favorable terms.
- Choose the Right Type of Finance: Consider the different types of car finance available and choose the one that best suits your needs and budget. PCP finance may offer lower
- monthly payments, but you will need to make a balloon payment at the end of the agreement if you want to keep the car. HP finance may be a better option if you want to own the car outright at the end of the agreement. Personal loans can be a good choice if you want flexibility and control over your repayments.
- Shop Around: Don’t just accept the first car finance offer you receive. Shop around and compare different lenders to find the best deal for you. Specialist lenders may be more willing to lend to people with bad credit, but you should still check the interest rates and fees to make sure you can afford the repayments.
- Consider a Used Car: Buying a used car can be a more affordable option than buying a brand-new one. Used cars are often cheaper to buy and can be more affordable to finance. They may also be a good option if you are worried about your ability to keep up with the repayments, as they are generally less expensive than new cars.
- Make Repayments on Time: Once you have been approved for car finance, it’s important to make your repayments on time and in full. This will help to improve your credit score over time, making it easier for you to get approved for credit in the future. If you are struggling to keep up with your repayments, contact your lender as soon as possible to discuss your options.
In summary, getting car finance with bad credit can be a challenge, but it’s not impossible. There are still options available for people with bad credit who need to finance a vehicle, including specialist lenders, larger deposits, and guarantors. By taking steps to improve your credit score and choosing the right type of finance for your needs, you can increase your chances of getting approved and driving away in the car of your dreams.