It’s a common misconception that having a bad credit rating means that you will be rejected for any sort of loan or finance. If you’ve been refused car finance in the past, you’ll know how disheartening it is. However, bad credit doesn’t have to stop you from getting the car you want!
Car finance and credit scores
When applying for bad credit car finance, a potential finance lender will want an indication of whether you can be trusted to pay back your loan or finance. Your credit score reflects how good of a borrower you are and is determined by a number of factors. A bad or low credit score usually indicates that you have had problems making repayments in the past. Your credit score can be checked by potential lenders using a hard or soft search. A soft search means that a potential lender can search your credit file but doesn’t have full access and it also doesn’t harm your current credit search. A hard search however does leave a mark on your credit report, meaning that potential lenders can view your full credit report, see when you have applied for credit in the past and if you have been declined. Lenders should tell you first if they are going to perform a hard search.
Check your credit file
One of the first things you should do before applying for car finance is check your credit file. You can check your credit file online for free using Experian, Equifax or Credit Karma. When you check your credit file you should make sure all your information is up-to-date and accurate. Even having the wrong current address could be affecting your credit score. You should also consider removing any financial partners you no longer need. If you have taken out a joint application with someone else, you may still be financially linked. If you no longer have an active credit agreement with them and they have a low credit score, their score may be dragging yours down.
Types of car finance
In the UK there are typically 3 types of car finance agreements which are most popular. They are personal loan, Hire Purchase (HP) and Personal Contract Purchase (PCP) agreement. Within these agreements you usually borrow a set amount of money from a lender to fund your car and then pay it back in monthly instalments with interest to an agreed term. Each agreement does have its own terms and conditions so its best to do your research first. You may be more suited to a specific agreement depending on what you want. For example, as a personal loan can be used for pretty much anything, you can buy your desired car outright and be the automatic owner of the car whilst you make your repayments. Whereas, with an HP or PCP agreement, you aren’t the legal owner of the car until the last payment has been made.
Avoid multiple applications
As mentioned, some credit lenders will perform a search on your credit file before they decide whether to accept or decline you for finance. Making multiple credit applications in a short space of time can harm your credit score. When a hard search is performed, a mark is left on your credit file and can harm your credit score. So multiple applications can be detrimental to your current score and it can also indicate to lenders that you are desperate for credit.
Increase your deposit
The bigger deposit you put down for a car, the less you have to borrow in the long run and can reduce your monthly payments. A bigger deposit can increase your chances of getting approved for car finance. However, if you want to keep your savings for a rainy day, there are also now deposit options available for people with bad credit.
Pay off your debts
This one can be tricky if you’ve had problems in the past paying back your debts or money owed. However, this is one of the best ways you can increase your credit score. Ultimately, lenders want to see that you are able to pay back your bills on time and in full and even a few months’ evidence of making all your repayments on time can improve your credit score.
Work out your budget
Car finance is a great way to get the car you want in affordable monthly payments but make sure you can actually afford it each month. If you have high levels of debt and repayments, it may be hard for you to commit to a finance deal that you will stick to. There are also other costs associated with owning and running a car such as insurance, road tax, fuel costs, breakdown cover, MOT and servicing costs and more. When calculating your car finance budget, make sure you aren’t going to sell yourself short each month.