Having a low credit score can really knock your confidence when it comes to getting a car on finance. Getting accepted for a car loan may be harder if you have a history of missed or late payments or have high levels of existing debt. However, you may not be applying for the right sort of car loans. Car finance is never guaranteed to anyone but there can be specialist lenders and types of car finance agreements which can be more suited to those with bad credit. The guide below explores each in more detail and if you’ve been struggling to get approved, a few handy tips on how to raise your credit score too.
What is bad credit?
Your credit score is a number that reflects your history of borrowing. This can be credit cards, mobile phone contract, mortgages, car finance and much more. If you have a history of not paying your bills on time and in full or making late repayments, you may find yourself with a bad credit score. Your credit score reflects your creditworthiness so having a low score can put potential lenders off. A bad credit score may mean you find it harder to get accepted for car finance or any other types of credit. You can start to rebuild your credit score by making your payments on time, reducing any existing debt you have, keeping credit applications to a minimum and having a low credit utilisation ratio. It can be possible to get approved for car finance when you have a low credit score, but you may be better suited to one of the loans below.
Hire purchase
Hire purchase car finance is a popular loan for those with bad credit. Within a hire purchase agreement, you pay off the full cost of your chosen car in monthly payments over a number of years. Monthly payments can include interest on top and can be spread over 1-5 years. Hire purchase is a type of secured loan which means its secured against the vehicle. This makes it a good option for those with bad credit because the lender can use the car as collateral if you fail to meet your repayments. You can also part exchange cars within hire purchase agreements to help offset the cost of your next car and reduce the loan amount.
Guarantor loan
A guarantor loan may not be for everyone, but it can be a good option if you’ve already been declined. A guarantor car loan is when a friend or family member agrees to pay your car finance payments if you fail to do so. If you’ve got a history of missed payments, it can be hard to find someone who will do this for you. But having a guarantor can essentially give the lender two chances for the loan to be paid back. If both parties fail to make the payments, their credit files can be negatively affected, and more serious financial implications may follow.
Black box finance
Black box car finance or pay as you go finance, is a type of hire purchase agreement that helps drivers keep up to date with their payments. For black box finance, a small device is fitted inside the vehicle and communicates with your finance lender through GPRS. The box doesn’t track your driving style but instead can send reminders when car finance payments are due. Some black boxes have the ability to disable the engine and if you fail to make your payments on time, the car won’t start. However, it’s worth checking which type of black box will be fitted before you agree to the terms.
Personal Contract Purchase
PCP car finance deals can be offered to those with low credit scores because you are only paying for part of the cost of the vehicle. Unlike hire purchase, you don’t spread the cost of the car but instead cover the cost of depreciation. You are essentially hiring the car during the agreement and can hand the car back at the end of the contract. It’s worth noting that you will need to set an annual mileage limit at the start of the agreement, and you may be charged if you exceed the mileage limit. You must also keep the car in good condition throughout the agreement and damage charges can occur.
Joint car finance
If you’re struggling to get approved for finance, you may consider applying for finance with someone else. A joint finance deal is different to a guarantor because both parties will be responsible for making repayments. Joint finance can be good for couples who both want to use the vehicle and pay for it together. If you have a low credit score but good income, you can use your partners ‘good’ credit score to help you get approved.
