How To Get Car Finance With Bad Credit – Guide

How to get a car with bad credit

While some people are lucky enough to pay for a car outright, most of us need to borrow money to pay for a new vehicle. Traditionally, consumers would simply take out a loan and pay off the money month by month. Still, modern car buyers are now being presented with an array of new payment types due to car financing becoming a thriving industry. As with any form of borrowing, car finance deals require the borrower to perform a credit check. This can be a daunting prospect if you have bad credit, but thankfully, a low credit score doesn’t have to be the end of the road.

We’ve explored some of the finance options available to people with bad credit to help you understand how to approach a new car purchase if your credit score needs a jump start.

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What do I need to think about before buying a new car?

However, when considering such a large purchase, it’s important to think about how it will impact your finances, now and in the future. Expenses, such as new cars, can have an impact on your finances for many years, particularly if they require you to take out a loan. Before you consider committing to paying such a large sum, try asking yourself the following questions:

  • Do you really need a new car?
  • Has your old car broken down?
  • Would any repairs your car needs be cheaper than buying a new car?
  • If repairing your current car will take time, could you borrow a car from a friend?
  • Could you choose a cheaper alternative, such as a second-hand car?
  • Could you save up and pay for a new or used car with a lump sum?
  • Could you ask a friend or family member for financial help with repairs or a car purchase and avoid borrowing money?
  • Will buying a new car prevent you from covering any other planned expenses or leave you financially vulnerable?

If you feel a new car may be an extravagant and unnecessary purchase, it could be worth delaying the expense until you are in a more stable financial position. By saving money to cover the cost of such a large purchase, you can avoid getting into debt and prevent your purchase from affecting your credit score. However, if you’re sure the time is right and you feel ready to trade in your old motor, it might be time to start exploring the different types of car finance on offer.

Your questions, answered

These days, there are many different options available when it comes to car finance. Before worrying about your credit history, it’s important to explore the various alternatives and consider which choice is best suited to you. 

Personal loan

A traditional form of car financing, a personal loan is a simple method of getting a lump sum together to purchase a new car outright. You can then pay back the loan via an agreed-upon repayment schedule at a fixed rate of interest. Personal loans are often a popular option for car buyers in a more stable financial position as they are rarely secured against your assets. This means less risk for you, but more for the lender, so you will often need a good credit score to secure a deal. By buying the car outright, you will be fully responsible for its ongoing maintenance and upkeep, covering any costs should something go wrong.

Credit card

A credit card is a more traditional form of financing for car purchases than a personal loan. If you can secure a 0% purchase credit card, you could purchase your car outright and pay no interest on your credit for the length of time agreed in your contract. Credit cards are a flexible option as you can pay off varying amounts each month if you meet the minimum repayment, and the lack of interest means the amount borrowed will stay the same. Unfortunately, 0% credit cards often require a good credit history if you want to secure a high credit limit, so they are rarely an option for those struggling with a low credit score. As with other forms of outright purchase, you will also need to consider how you will cover the ongoing cost of maintenance and repairs should something go wrong. 

Hire purchase

Hire purchase is a form of secured loan. When you enter a hire purchase agreement, you will usually be required to put down a deposit and then make monthly payments towards the total cost of your car. Due to the nature of this loan, you will not technically own the car until you have finished making your payments and will often be required to pay an additional purchase fee to secure the vehicle. As this loan is secured against the car, you risk losing it if you fail to make your payments. However, this does make it a lower risk option for lenders, so it could be a choice to consider if you are worried about applying for finance with a low credit score.

0% finance

Like hire purchase, 0% finance car deals often require the borrower to put down a deposit and then pay monthly repayments via an agreed upon repayment schedule. The main difference is that your finance comes with 0% interest – either throughout the agreement or for a set period – so you are likely to need to pay a higher deposit and monthly repayments. If you stick to the terms of your agreement, your 0% interest will continue for the period set out in your contract. 

Car leasing

Car leasing is an alternative to owning a car. Rather than purchasing a vehicle, you simply make regular payments and continue to use the car if you are making payments. The level of payment you make is usually directly linked to the car’s value, but it is also influenced by the length of hire and the amount of mileage you will be covering. In general, car leasing requires smaller monthly payments than if you were paying off a car bought on credit, but there can be extra charges. For example, if you damage the car during the lease period, you may be required to pay a fee when you return it. Some lease companies will insist that you take out insurance to cover damage, which requires additional monthly payments. While you do not own the car, you will sign a contract when you secure your lease. Any breach of the contract, such as failing to make repayments, can result in a penalty fee. 

Personal Contract Purchase (PCP)

A Personal Contract Purchase, or PCP, has become one of the most popular forms of car finance in recent years. The main reason for its popularity is the flexibility that this type of finance offers, but flexibility can also have its challenges. A complex option, a PCP can be used in various ways to suit the buyer and be altered throughout the contract. When you take out a PCP, you don’t buy the car outright. Instead, you put down a non-refundable deposit and borrow the remaining balance. You will then make monthly payments via a pre-determined schedule that will cover the costs of interest, along with the cost of the car’s depreciation throughout your plan. Once you reach the end of a PCP contract, you will have several options. Commonly these include:

  • Buying the car: Pay the value of the car minus your initial deposit.
  • Replacing the car: Trade the car in for a replacement and begin a new PCP plan.
  • Returning the car: Assuming the car is in good condition, you can return it and walk away.

If you like the idea of having a new car and want to replace your vehicle as regularly as possible, a PCP plan could be an ideal choice. They also offer low monthly repayments as you are simply covering the costs of interest and depreciation. However, they often incur high-interest rates and require an ongoing monthly commitment to be a difficult form of finance to secure if you have bad credit.

We often hear the terms’ bad credit score’ or ‘poor credit history’, but what do they actually mean? Bad credit is a general term that refers to a credit report that reflects negatively on the finances of the person it represents. When we talk about bad credit, we often think of a credit score. Everyone has a credit score – dozens, in fact – that is often displayed as a single three-digit number. This number gives money lenders an idea of how reliable you are when borrowing money. Higher numbers suggest you are a trustworthy borrower, and lower numbers suggesting you may be high risk and potentially avoided. 

Credit scores are based on your credit history. This means your history with borrowing money and paying back debts will be reflected in your score and could affect your chances of borrowing again in the future. Some of the most common behaviours that lead to a poor credit score include:

  • Missing scheduled repayments on loans and credit cards.
  • Frequently applying for new forms of credit.
  • Having a credit application rejected.
  • Having debts handed to courts or debt collectors.
  • Having large amounts of credit available.
  • Using a significant percentage of any credit you have available.
  • Frequently changing your address, suggesting an unstable and unpredictable lifestyle.

Regardless of your credit history, a low score doesn’t have to be the end of the road when it comes to applying for credit. There are many steps you can take to improve your score:

  • Meet your scheduled repayments.
  • Pay off your credit cards in full each month.
  • Where you can’t pay off your debt in full, make sure you pay the minimum each time.
  • Avoid making multiple credit applications in a short period.
  • Close unused credit accounts to reduce your perceived ability to take on debt.
  • With remaining accounts, keep spending as low as possible to demonstrate that you are financially stable.
  • If you can afford to, put your name on utilities and other bills and pay on time.
  • Use an affordable credit card for small, everyday purchases and avoid large expenses.
  • Where possible, borrow any emergency funds you need from friends or family.

Remember, there is no ‘magic’ target credit score that you should aim for. Instead, experts suggest you should focus on improving your financial habits all the time to keep your score as high as possible.

To get the best car finance deals, you need to have a good credit score, but that doesn’t mean bad credit will prevent you from getting a new set of wheels. While some forms of car finance won’t be available to you, there are many methods of borrowing that can be secured without the need for a glowing credit history. 

In some cases, lenders will allow you to commit to car finance with alternative conditions, such as higher rates of interest or larger initial deposits. This may be a good option if you have a poor history but currently have a stable income to cover the additional costs. However, if you are concerned that you may struggle to meet monthly repayments, you should avoid high interest offers to prevent yourself from falling further into debt. 

Many brokers, such as The Money Shop’s partner, offer the chance of securing a loan before you apply. This prevents you from being rejected and having another black mark left on your credit history. To check your eligibility and chance of approval, enter the amount you want to borrow into our loan calculator. You will then have the opportunity of seeing how much interest you will have to pay on your loan, as well as the repayment schedule you will have to keep to if your application is approved. If you feel you can meet the repayments, fill in our online form, and we will give you an instant decision. Once approved, your money could be in your bank account on the same day, and you could purchase your new set of wheels the same day. 

Making multiple credit applications can hurt your credit score, as can having your credit application rejected. If you are worried that you may not be accepted for car finance and you can delay your purchase, consider following our guidelines above to help you improve your credit rating. It can take several months to improve your credit score, but every step you take will get you one step closer to your new car. If you’re feeling daunted by the process, begin by simply checking your credit file. Finding mistakes or potentially fraudulent activity could significantly impact your score without any change of behaviour on your part, so it is important to make sure nothing is overlooked. If you are worried that an error has been made, contact the lender to have the issue rectified or leave a note to explain to potential lenders why it is not representative of your general financial behaviour. 

We hope our guide has helped answer any questions you may have about getting a car with bad credit. We have a whole host of in-depth guides available to answer some of the most common questions about lending options and issues concerning debts. If you would like more information about borrowing or credit scores, please click on the links below. Alternatively, get in touch with our Customer Service team to discuss our loan options. Our dedicated team is on hand seven days a week to answer your queries, whether you are a current customer or a prospective borrower.