It’s a common misconception that having a bad credit score means you can’tget a car on finance or get accepted for other types of loans or finance. It can be harder to get a car finance approval in your name if you have a history of bad financial decisions. However, there are now more options than ever when it comes to getting a car with a low credit score. Car finance has become more accessible in recent years and some lenders are focusing more on whether you can afford finance rather than your credit history. With this mind, let’s take a look at how bad credit can affect your financial life and how to increase your chances of getting a car on finance.
What is Bad Credit?
Your credit score is a numerical piece of data which can be found on your credit report. Your credit report is kind of like your financial CV and shows how you’ve handled credit un the past and your history of making repayments. Credit referencing agencies will give you a credit score, but each use their own criteria to determine your score. A score that is ‘average’ with one lender may be seen as ‘bad’ with another. It’s worth checking your credit score with different agencies to see where you fall on the credit scale.
What Causes you to have a Bad Credit Score?
There are a number of factors which can negatively affect your credit score. There are certain financial behaviours which can be like red flags to finance lenders. These can include missing payments, using too much of your credit limit, frequently opening new accounts, applying for credit often, having no credit history or borrowing more than you can afford to pay back.
How Does Bad Credit Affect car Finance?
Getting a car on finance with bad credit doesn’t have to impossible but there are a number of ways in which your finance package could be affected.
- Harder to get accepted. Having a low credit score may put potential lenders off as it can indicate that you’ve struggled to handle finance in the past. For many lenders, they use your credit score to predict your future behaviour. However, some bad credit lenders put more focus on your current affordability rather than your past mistakes.
- Higher interest rate. Typically, the best car finance rates are reserved for those with better credit scores. This is because they are less of a risk to lend to and can get access to higher credit card limits too. Some lenders can set higher interst rates for those with poor credit history to secure the deal. Higher interest means you pay more overall, and it can cost you more than it needs to.
What can you do Before Applying for a Car Loan with Bad Credit?
If you’re worried about getting approved for a car loan with bad credit. There are a few ways in which you can help to support your application.
1. Apply with someone else.
If you can get approved on your own, you may consider a joint car finance deal. Joint car finance is when two people, usually a couple apply for finance on the same car. If you have bad credit but a good income and your partner has better credit, lenders can use this information on your application. Both parties will be responsible for the repayments and if you both fail to pay, your credit files can be negatively impacted, and the car could be taken off you. It’s important that you only take out a finance deal which you know you can pay back.
2. Choose the right lender
When you have a bad credit score it can be harder to get accepted with mainstream lenders. The key to getting car finance with bad credit could be choosing the right lender with the right finance package. Hire purchase car finance is a secured loan which means the lender owns the car throughout the agreement. This type of deal could be good for those with bad credit as the lender can use the car as collateral if you fail to meet the terms of the agreement.
3. Build a credit history
Many people assume that not having taken out credit before means you will have a good credit score. However, no credit history means there’s no way to know what type of borrower you will be. Getting no credit car finance can be possible but its best to try build a small credit history before you start applying. You can do this by getting a mobile phone contract in your name and paying it on time via direct debit. Alternatively, you could consider a credit builder card and make small purchase and pay them off each month.