Buying a car on finance is one of the most popular ways to get behind the wheel of a new model, but can you finance a car if you have bad credit? Read on for all you need to know.
The good news is that it’s possible to get approved for car finance even if you have a bad credit score. There’s no minimum credit rating to get approved, you just need to find the right lender.
Your options may be limited, and some lenders may increase interest rates for those with bad credit. This guide will walk you through how to get the best deal with a poor credit score.
It’s important to remember to stay within your means when it comes to financing. If you don’t think you can afford the monthly payments, then buying in cash is always an option. If you’re facing financial troubles, you should consult an independent financial advisor.
How to increase your chances of being accepted for car finance with bad credit
Your credit score is essentially your financial history, and lenders will use it to assess the risk of giving you credit (such as a car finance agreement).
Your credit score can be affected by things like missing loan payments, outstanding debts, being declared bankrupt and making late payments on bills. You can check your credit score for free through many credit referencing agencies.
If you have a low credit score, there are things you can do to improve it. Below are some tips for improving your credit score:
Pay off your debts
The most obvious way to improve your credit score is to pay off any outstanding debts you have. It won’t wipe your credit history clean, but clearing as much debt as you can shows lenders that you’re making positive steps to improve it.
You also want to keep on top of your bills. Falling behind on your phone contract and utility bills can have a big impact on your score, so make sure these are all up to date.
Keep loan applications to a minimum
When you apply for a loan, the lender will perform what’s known as a ‘hard search’ on you. These stay on your credit record.
It’s best then to avoid applying for too many loans. If you want to get an idea of whether you will be approved, most lenders will have an eligibility checker (otherwise known as a soft search) that won’t show up on your credit history.
Try a guarantor loan
Some loans will come with the option to nominate a guarantor (someone who’ll be responsible for repaying the loan if you miss your payments). You’ll need someone willing to sign the agreement as a guarantor, though.
Increase your deposit
It may be easier to get a finance agreement if you increase your initial deposit. Most finance companies will ask for a deposit of around 10% of the car’s value, however, paying more upfront lowers the risk to the lender and can increase your chances of getting approved.
Where to get car finance with bad credit
The trickiest part of getting car finance when you have bad credit is finding a lender who will approve you. This is because they see you as a higher risk to lend to.
That said, there are still options for those with bad credit, you just need to choose which is right for you. Below are some of the places you could look at getting financed.
Through a car dealership
Most main dealers will offer finance in some form or another, usually Personal Contract Purchase or Hire Purchase. Dealers tend to have lower requirements for a finance agreement because you’re securing a loan against the car, so they can repossess it if you’re unable to keep up with the finance payments.
This lowers the risk to the lender, making it more likely that you’ll be approved. Just be wary of potentially higher interest rates on dealership finance, and make sure you can comfortably afford the monthly payments before signing on the dotted line. Remember, paying in cash is always an option.
Through a bank
A lot of banks offer car finance, and the interest rates may be lower than you’ll get from a dealership. The key is to shop around for the lowest rates, then use the company’s eligibility checker to see if you’ll be approved without a full application.
A bank may also be able to give you a personal loan to buy your next car. This would be secured against an asset such as the car or your house, so be extremely careful when going down this route and be sure you can make the payments.
What do you need to apply for car finance?
To apply for a loan, you’ll need proof of ID (such as a driving licence or passport), proof of address (such as a utility bill), and a deposit to put down upfront. Some lenders will also ask for a few payslips as proof of income, especially if you have a low credit score.
How does car finance affect your credit score?
This will depend on whether you keep up your payments or not. If you make every payment on time or early, this will help improve your credit score.
If you fall behind or stop making your payments, not only may your car be repossessed but your credit score will start to drop. It’s for this reason that you need to carefully consider your monthly budget and only borrow what you can afford to pay back.
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