Tips and advice

Getting car finance with bad credit

If you have a bad credit rating or history, it’s still possible to get car finance. We explain your options

Bad credit finance - header

A bad credit score may feel disastrous if you’re looking to purchase a new car on credit. Although lenders can’t legally guarantee that they’ll agree to give you finance, a large number of firms will work hard to try and arrange a finance or leasing package for those with a poor credit rating, so there could still be options available to you.

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Some caution is advisable, as some of these packages can carry extremely high interest rates. It’s therefore worth knowing what your choices are and how you can give yourself the best chance of approval for car finance.

What is a bad credit rating?

A bad credit rating can be caused by anything from missed credit-card and mortgage repayments, right through to County Court Judgments (CCJs) and bankruptcy claims.

With such a wide variety of variables at play, it’s worth knowing that a bad credit score isn’t intrinsically ‘bad’. Different lenders use different criteria when assessing the risk you pose as a loan applicant, and this means credit ratings are relative. Just because you’ve been judged too high a risk for one company, doesn’t mean all companies will reject your application.

It’s also worth bearing in mind that the bigger the loan, the more stringent the stress tests are for borrowers. That means if you’ve had a mortgage application turned down, you may well be able to get car finance, because the value of the asset you’re borrowing for is substantially less.

How to apply for car finance if you have bad credit

While some companies may approve you and others may turn you down, don’t get carried away by applying to as many companies as possible  – being declined for credit several times can, ironically, contribute to a bad credit score.

While some companies may approve you and others may turn you down, don’t get carried away by applying to as many companies as possible  – being declined for credit several times can, ironically, contribute to a bad credit score.

This may sound like a catch-22 situation but if you think it’s possible that you’ll be declined credit, plan to spread out your loan applications over time and only apply to organisations you’d actually consider borrowing from.

It’s also a good idea to check your credit score before applying for a loan or car finance. While the results won’t guarantee you’ll be approved or declined, they’ll give a fair indication of the likely outcome. Some comparison websites and finance providers allow you to enter your details on their websites to find out if it's likely you'd be accepted for credit before performing a full credit check.

Most credit-checking agencies make a ‘soft’ check, so while there’ll be a note on your credit record, this shouldn’t show up when a lender makes a full-scale ‘hard’ credit check on you for car finance.

If you have any outstanding loans, try to pay these off before making any further loan applications. Also consider asking a close friend or family member to act as guarantor, as this may make you a more attractive prospect to lenders. We have a full guide to guarantor loans.

PCP deals explained – what is PCP finance?

I think I’ve got a bad credit rating. Who’ll give me car finance?

If you’re fairly certain you’ve got a bad credit rating, don’t assume it’s a given you’ll be forced to use a lender that specialises in giving credit to high-risk clients.

Such subprime lenders may be more likely to give you a loan or get you car finance, but the interest they charge is likely to be high.

Most main car dealerships charge anywhere from 0-7% APR but subprime lenders can charge as much as 50%, making it a very expensive option. It’s usually a better option to use a specialist car finance lender, as opposed to one that specialises in applicants with poor credit ratings, as they’re likely to offer more reasonable deals. 

If you haven’t done so already, it may be worth talking to your bank or building society as a source of credit. Additionally, local credit unions are another potential source. Some employers may be willing to give you a loan for a car, so consider investigating via your boss or HR department.

If you don’t need to buy a car immediately

Most people who are searching for a new car need to get it reasonably quickly but if you aren’t in a rush, there are some ways that you can improve your credit score in the meantime. Taking out a credit card, using it and keeping up the repayments on time or buying a ‘big ticket’ item such as a TV or sofa are just two ways you can potentially boost your score. You should also make sure you’re on the electoral roll.

Getting car finance with bad credit

If you’ve exhausted all other avenues and it looks like a subprime credit agency is the only way forward, then be sure to shop around. Some car dealers will offer to pass your details on to an alternative lender, but it’s well worth seeing if you can get a better deal elsewhere.

Whichever route you choose, be absolutely certain you can make the monthly repayments and keep a close eye on the APR (the rate of interest). You need to be sure of and happy with exactly how much the car will cost you overall and that you can meet the repayments. There is an element of risk with any loan but remember that if you are using an asset such as your house as collateral, the lender can ultimately begin repossession proceedings if you fail to keep up the repayments.

As with any financial agreement, make sure you’ve read and understand the small print. Are there any penalties for leaving the agreement early? Is the mileage limit realistic and does excess mileage incur a reasonable charge? Also beware some lenders will tack on additional warranty or insurance policies and, assuming you want these, they can sometimes be purchased for less elsewhere.

Finally, bear in mind that just because you’ve been forced down a potentially high-interest route, it needn’t be forever: by taking out a loan or a credit agreement – even if it’s expensive – and honouring the repayments, you’ll ultimately be improving your credit rating.

Click here to read more on the three main types of car finance: Personal Contract Purchase (PCP), Hire Purchase (HP) and Personal Contract Hire (PCH).

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