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When you have a low credit score it can seem impossible to get approved for loans or finance. With a bad credit score, you can pose more of a risk to lend to as you’ve probably had trouble sticking to the rules of a finance agreement in the past. However, not all hope is lost! It can be possible to get car finance for bad credit but you may be more suited to certain lenders or finance agreements over others. The guide below has been designed to help you discover the factors that can affect your car finance approval and how to get a car on finance with a low credit score.
Which factors affect car finance approvals?
If you have a low credit score, you may have already been declined car finance. However, if you have been rejected and aren’t sure why, there are other factors which can affect the likelihood of getting a car finance approval.
- Credit score. The main reason your car credit application may be declined is due to a low credit score. If you’ve missed payments in the past, had a default on your credit file or have high levels of existing debt, you may find yourself with a bad credit score. A lower credit score makes you more of a risk to lend to as you’re more likely to default on your car finance again. If possible, you should try to boost your credit score before you apply for car finance, this can help to increase chances of approval and also help you get a better rate.
- Employment status. Getting car finance isn’t just about your credit score, car finance lenders need to know how much you can afford to pay each month and how you’re able to pay it. Lenders will usually require 3 months’ worth of bank statements to confirm your income and outgoings. Having a full-time job with a steady income is the most favourable but you can also get car finance for people on benefits if you meet the qualifying criteria.
- Age. Car finance is a legal agreement which means you need to be at least 18 years old before you could secure a finance deal. Each lender has their own criteria but usually you can finance a car between the ages of 18-70 years old. If you do not meet the required age limit or exceed it, you may be refused.
- Residential status. Lenders don’t tend to favour applicants who move around a lot and prefer applicants who can provide 3+ years of address history in the UK. This helps to reduce the number of fraudulent applications and know where the car will be kept.
Car finance deals for bad credit
It is true that there are certain types of car finance can be better suited to those with bad credit. Personal loans are usually supplied by banks and building societies and can be much harder to obtain if you have bad credit. Personal loans are a type of unsecured loan which means there’s no collateral if you fail to repay. Its recommend that you avoid personal loans with bad credit as the low rates are usually reserved for those with good or excellent credit scores. However, you may be more suited to a hire purchase or PCP car finance agreement.
Hire purchase car finance
Hire purchase is a form of car finance which allows you to spread the cost of your chosen vehicle into monthly payments. Within HP, you can finance a new or used car and pay for it monthly with added interest. Hire purchase is a form of secured loan which means the lender owns the car throughout the agreement until the final optional to purchase fee has been made. This means if you default on your finance deal or fail to repay, the lender has the right to take the car away from you. Hire purchase can be more accessible for those with bad credit as you can risk losing the car, so the lender doesn’t lose out if you don’t pay your loan back on time and in full.
Personal Contract Purchase (PCP)
Personal Contract Purchase is another form of car finance that could be suited to those with a lower credit score, but you may struggle to get approved on a brand-new car. PCP can be used to finance a used car and can benefit from lower monthly payments. Unlike HP, you don’t spread the cost of the vehicle you choose and instead cover the value the car loses over your finance term. At the end of the agreement, you then have a large balloon payment to pay if you wish to keep the car. However, most drivers choose to hand their car back or use the value towards another PCP deal. PCP is also a form of secured loan which means that the lender can take the car off you if you fail to repay. It’s important that you never take out a finance deal that you can’t afford as it can lead to serious financial consequences and impact your ability to get finance in the future.
David Prior
David Prior is the editor of Today News, responsible for the overall editorial strategy. He is an NCTJ-qualified journalist with over 20 years’ experience, and is also editor of the award-winning hyperlocal news title Altrincham Today. His LinkedIn profile is here.
