Getting Car Finance With Bad Credit – An Explainer

Car financing can be a hassle if you have a poor credit score. However, it isn't necessarily a barrier to buying a new car. There are several lenders who offer loans to those who have bad credit, but their interest rates can be extremely high. This explainer explores all the options for car finance with a bad credit rating or history.

Getting car finance with bad credit

What is a credit score?

A credit score is a three-digit number that represents your borrowing history. Every lender performs a credit check prior to approving your loan or car financing to make sure you can afford the monthly payments. If you’ve missed mortgage or credit card payments, made late payments or have ever been declared bankrupt, your credit score is affected negatively. Even factors like length of time at your current job and your current address are taken into consideration when assigning a credit score. A better credit score makes it more likely that you’ll be approved for loans and financing deals, as well as helping you avoid high interest rates on repayments.

Generally, a score below 500 is considered poor, while a score above 800 is considered excellent. Note that different companies use different criteria to measure your credit score. Just because your loan is rejected by one lender, it doesn’t mean that you won’t be able to get a loan elsewhere. It’s a good idea to check your credit score online before you approach a lender.

Car finance with a poor credit score

Whether you’re looking to purchase a new or used car, there are several options available to get your car financed:

  • Personal contract purchase. PCP finance is the most popular form of finance as it offers low monthly payments. It uses the car’s depreciation value to calculate what you’ll pay every month. You also have more flexibility at the end of the contract – once the term ends, you can choose to either make the optional final payment to own the car or simply return it.
  • Hire purchase finance. HP finance is costlier on a month-to-month basis but is less expensive overall. Your monthly payments go directly towards paying for the car. It’s the better deal if you’re certain you want to own the car once the term ends, as there’s no final ‘balloon’ payment required for ownership.
  • Loans. Check in your local area for credit unions. You can also approach your bank or building society for a personal loan. Some employers may also be able to offer a loan for your car.
  • Subprime lenders. Taking out a car loan from subprime lenders should be your last option if all other avenues are exhausted. These lenders will approve your loan much more easily, even if you have bad credit, but your monthly payments are going to be far more expensive. While car dealerships charge an Annual Percentage Rate (APR) of 0-7%, subprime lenders can charge up to 50%.

Before you apply

Here are some tips to make sure you get the best deal from any car finance deal:

  • Purchase a used car, rather than a new one. Buying a used car not only helps you reduce your overall costs but also helps you secure better deals, as car loans are dependent on the depreciation value of the car. Most cars lose over half their value within the first three years.
  • Don’t send out multiple applications at the same time – this can also affect your credit score negatively. Space out the applications and work on improving your credit score if possible.
  • If you have the money available now, increase your initial deposit on a finance deal so that your monthly payments are reduced. Fewer, small monthly repayments will mean you can avoid paying so much in interest if your bad credit means accepting a higher rate of APR.
  • Keep a close eye on the APRs, research thoroughly and shop around. Make sure you have all the information when it’s time for you to approach a lender. Negotiate on loan terms rather than just monthly payments. Due of higher APRs, you may end up paying more than the car’s full value by the end of the loan because of interest accumulation.
  • Understand the small print. What are the penalties for leaving the agreement early? Are the charges for excess mileage reasonable?
  • Be wary of ‘guaranteed finance’. While it’s quick and easy to get your loan approved, the exorbitant charges can become a financial burden down the road.
  • Look out for add-ons. Nonessential services like extended warranties and aftermarket services may not be useful to you. You may also be able to get better insurance rates elsewhere. Never enter a finance deal that is contingent upon accepting add-ons.
  • Look first at lenders who specialise in car finance – they may be able to offer better deals than general lenders.

How to improve your credit score

Whether you have bad credit or not, working on improving your credit score can maximise your chance of getting the best deal from a lender. Here are some things you can do to potentially improve your credit score:

  • Register to vote. If you’re not on the electoral roll, it will take your lender an additional step to verify your address.
  • Be punctual. Make sure to always make any current repayments on time.
  • Close bad joint accounts. It’s a good idea to issue a notice of disassociation, which means you will be no longer be financially linked to them.
  • Make sure that old defaults, bankruptcies or county court judgements are removed. This is usually done automatically, but it’s worth checking your credit report.
  • Don’t close all old credits. Credits on which you’ve made regular monthly payments can look good to any potential lender.

What if I have no credit?

Young drivers who have no credit can also face issues while getting their car loan approved. If you have no credit, even taking out a loan for smaller purchases like a TV or new phone can give lenders some indication of your financial habits. Most importantly, make sure you have a bank account.

You can also use a guarantor to get your loan approved. With guarantor finance, you’ll need a friend or family member with a strong credit rating who will agree to step in and make your payments if you fail to do so.

Whether you have poor credit or no credit, there are several options available in the market today to help you get your car finance approved. Look around on Gumtree’s exhaustive listings to find an affordable car that suits your budget and lifestyle. If you’re still unsure about car finance, the Gumtree advice hub can help you find the best option for buying or leasing a car.


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