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Tip: Before applying, check your credit report for errors. Correcting any mistakes could improve your credit score and increase your chances of approval.

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What Is Bad Credit Car Finance?

Bad credit car finance is designed for individuals with a less-than-perfect credit history who are looking to purchase a car. Specialised Car Finance Companies and lenders offer tailored loans and credit products to help people with poor credit scores obtain the vehicle they need.

When you have a bad credit score, mainstream lenders may be hesitant to approve your application. However, specialist bad credit lenders understand that a person's financial situation can change and that past difficulties don't necessarily reflect their current ability to make repayments.

How Can I Get Car Finance with Bad Credit?

Getting car finance with bad credit may seem daunting, but there are several steps you can take to increase your chances of approval:

  1. Check your credit report: Before applying for car finance, review your credit report for any errors or areas for improvement. You can access your report for free from credit reference agencies such as Experian, Equifax, or TransUnion.
  2. Consider a guarantor: If you have a trusted friend or family member with a good credit history, they can act as a guarantor on your loan. This means they agree to make repayments if you cannot, reducing the risk for the lender and potentially improving your chances of approval.
  3. Save a larger deposit: Putting down a larger deposit can demonstrate your commitment to the purchase and reduce the amount you need to borrow. This can make you a more attractive candidate to potential lenders.
  4. Use an eligibility checker: Many Car Finance Companies offer eligibility checkers that allow you to see your chances of approval without affecting your credit score. This can help you avoid applying for loans you're unlikely to get, which could further damage your credit rating.
  5. Compare different lenders: Don't settle for the first bad credit car finance deal you find. Compare quotes from multiple lenders, including specialised Car Finance Companies and credit unions, to find the most competitive rates and terms for your circumstances.

Did you know: Some lenders offer 'soft search' quotes that won't affect your credit score. Use these to compare offers before making a formal application.

What Are the Best Bad Credit Car Finance Options?

When looking for bad credit car finance, there are several options to consider:

  1. Personal Contract Purchase (PCP): With PCP, you pay a deposit and make monthly repayments for a fixed term. At the end of the agreement, you can choose to return the car, make a final payment to own it, or trade it in for a new vehicle. PCP often comes with lower monthly payments than other finance options, making it a popular choice for those with bad credit.
  2. Hire Purchase (HP): HP involves paying a deposit and making fixed monthly repayments over an agreed term. Once you've made all the payments, you own the car outright. HP is a good option if you want to eventually own the vehicle and can afford the higher monthly repayments.
  3. Guarantor Loan: A guarantor loan involves a friend or family member with a good credit history co-signing your loan agreement. They agree to make repayments if you cannot, reducing the risk for the lender. Guarantor loans can be a good option if you have a very low credit score and are struggling to get approved for other finance types.
  4. Credit Builder Card: While not specifically for car finance, using a credit builder card responsibly can help improve your credit score over time. By making small purchases and repaying the balance in full each month, you can demonstrate your ability to manage credit and potentially access better car finance deals in the future.
What Are the Best Bad Credit Car Finance Options

Remember: While a guarantor loan can help you secure finance, it's a big responsibility for the guarantor. Make sure both parties fully understand the implications before proceeding.

How Do I Compare Bad Credit Car Finance Deals?

When comparing bad credit car finance deals, there are several factors to consider:

  • APR: The Annual Percentage Rate (APR) is the total cost of borrowing, including interest and fees, expressed as a percentage of the loan amount. Look for the lowest APR possible to save money on interest charges.
  • Loan term: A longer loan term will mean lower monthly repayments but more interest paid overall. Choose a term that balances affordability with the total cost of borrowing.
  • Deposit: A larger deposit can reduce your monthly repayments and potentially improve your chances of approval. However, make sure you can afford the upfront cost.
  • Credit check: Some lenders perform a hard credit check when you apply, which can temporarily lower your credit score. Look for lenders that offer a soft search or eligibility checker first to avoid unnecessary hard checks.
  • Additional fees: Check for any hidden costs, such as administration fees, early repayment charges, or balloon payments. Factor these into your budget when comparing deals.

Tip: Look beyond the monthly payment. Calculate the total cost of the loan, including any fees, to truly compare deals.

Compare Negative Equity Car Loan

Car finance with negative equity also tends to come with higher interest rates due to the increased risk for the lenders.

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What to Consider When Taking Out a Bad Credit Loan

What to Consider When Taking Out a Bad Credit Loan?

Before applying for a bad credit car loan, there are several important factors to consider:

  1. Affordability: Ensure that you can comfortably afford the monthly repayments, taking into account your other financial commitments. Use a loan calculator to estimate your repayments and factor in any additional costs, such as insurance and maintenance.
  2. Interest rates: Bad credit loans typically come with higher interest rates than standard car finance. Compare rates from multiple lenders to find the most competitive deal, but be cautious of extremely low advertised rates, as these may not be available to everyone.
  3. Loan term: Consider the length of the loan term and how this will impact your monthly repayments and overall cost of borrowing. A longer term may make repayments more affordable but will increase the total amount of interest paid.
  4. Early repayment fees: Check if the lender charges any penalties for settling the loan early. If you think you may want to pay off the loan ahead of schedule, look for deals with low or no early repayment fees.
  5. Credit impact: Be mindful of how taking out a bad credit loan may affect your credit score. Making repayments on time can help improve your credit rating, but missed or late payments can have a negative impact.

Did you know: Some lenders specialise in bad credit car finance and may offer more competitive rates than mainstream banks for those with poor credit.

How Can I Improve My Credit Score?

Improving your credit score can help you access better car finance deals in the future. Here are some tips to boost your credit rating:

  1. Pay bills on time: Late or missed payments can significantly damage your credit score. Set up direct debits or reminders to ensure you pay all bills on time.
  2. Reduce credit utilisation: Try to keep your credit card balances below 30% of your credit limit. High credit utilisation can negatively impact your credit score.
  3. Register to vote: Being on the electoral roll can help lenders verify your identity and improve your credit score.
  4. Check for errors: Regularly review your credit report for any mistakes or inaccuracies. If you find any errors, contact the relevant lender or credit reference agency to have them corrected.
  5. Avoid multiple applications: Each time you apply for credit, a hard search is recorded on your credit file. Too many hard searches in a short period can lower your credit score. Use eligibility checkers or soft searches to see your chances of approval before applying.

Tip: Consider a credit-builder credit card. Used responsibly, it can help improve your credit score over time.

What Are Soft Searches and Eligibility Checkers?

When searching for bad credit car finance, you may come across terms like "soft searches" and "eligibility checkers". These tools allow you to see your likelihood of being approved for a loan without impacting your credit score.

  • Soft searches: A soft search, also known as a soft inquiry, is a type of credit check that doesn't leave a visible mark on your credit report. Lenders use soft searches to give you a provisional decision on your loan application without affecting your credit score.
  • Eligibility checkers: Many lenders and comparison websites offer eligibility checkers that perform a soft search on your credit file. By entering some basic information, you can get an indication of your chances of approval and the likely interest rate you'll be offered. This can help you narrow down your options and avoid applying for loans you're unlikely to get.

Using soft searches and eligibility checkers can help you shop around for bad credit car finance without damaging your credit score. However, keep in mind that a soft search doesn't guarantee approval, and the final decision may differ from the initial indication.

What Are the Alternatives to Applying for a Bad Credit Loan?

If you're struggling to get approved for a bad credit car loan, or the interest rates are too high, there are some alternatives to consider:

  1. Save up and pay cash: If possible, save up and pay for a used car in cash. This may take longer, but it will save you money on interest and help you avoid taking on debt.
  2. Improve your credit score: Work on improving your credit score before applying for car finance. This may involve paying down existing debts, correcting errors on your credit report, and building a positive payment history.
  3. Use a credit union: Credit unions are non-profit organisations that often offer more favourable terms to borrowers with poor credit history. They may have lower interest rates and more flexible eligibility criteria compared to traditional lenders.
  4. Rent-to-own: Some dealerships offer rent-to-own schemes where you make weekly or monthly payments to hire the car, with the option to purchase it at the end of the agreement. However, these schemes can be expensive and may not be suitable for everyone.
  5. Get a co-signer: If you have a trusted friend or family member with a good credit history, they could co-sign your loan agreement. This means they share responsibility for the loan and can help you secure a better interest rate. However, co-signing is a significant financial commitment and can impact the co-signer's credit score if payments are missed.
What Are the Alternatives to Applying for a Bad Credit Loan

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Various finance options cater to different financial circumstances, and researching these options can help find the best deal.

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What Hidden Costs Should I Look Out For?

When taking out a bad credit car loan, it's essential to be aware of any hidden costs that could increase the overall expense of the loan. Some common hidden costs to look out for include:

  1. Administration fees: Some lenders charge an upfront administration fee for processing your loan application. This can be a fixed amount or a percentage of the loan value.
  2. Early repayment charges: If you want to pay off your loan early, some lenders may charge an early repayment fee. This is usually a percentage of the outstanding loan balance or a fixed number of months' interest.
  3. Balloon payments: Some car finance agreements, particularly PCP deals, may include a large optional final payment, known as a balloon payment, at the end of the term. If you want to keep the car, you'll need to make this payment, which can be a significant expense.
  4. High mileage fees: If you exceed the agreed annual mileage limit on a PCP or contract hire agreement, you may be charged an excess mileage fee for every additional mile driven.
  5. Servicing and maintenance costs: Some car finance agreements may require you to stick to a specific servicing schedule or use approved garages for maintenance. These costs can add up over the term of the loan.

To avoid being caught out by hidden costs, carefully read the terms and conditions of any bad credit car finance agreement before signing. Ask the lender to clarify any fees or charges you're unsure about, and factor these into your budget when comparing deals.

Remember: GAP insurance isn't always necessary. Consider whether you really need it before adding it to your finance package.

Our Car Expert Comments:

"When financing your dream car, look at all options to find the best fit for your needs and budget. PCP is fantastic if you enjoy driving the latest models and want flexibility. For those with less-than-perfect credit but can manage monthly payments, HP offers a path to ownership. However, with a strong credit score and competitive interest rate, a car loan may be the most cost-effective. Consider your deposit, monthly budget, and long-term goals to navigate car finance with confidence and drive away with the best deal."

Charlotte Yates
Charlotte Yates

Personal finance content expert

Frequently Asked Questions

Yes, there are specialised lenders and bad credit car finance options available. However, you may face higher interest rates and less favourable terms than someone with a good credit score.

When you apply for car finance, lenders will typically perform a hard credit check, which can temporarily lower your credit score. However, some lenders offer a soft search or eligibility checker first, which won't impact your credit rating.

There is no universal minimum credit score for car finance, as each lender has its own criteria. However, a higher credit score will generally improve your chances of approval and help you secure better rates.

You can improve your credit score by paying bills on time, reducing your credit utilisation, closing unused credit accounts, and regularly checking your credit report for errors.

A secured loan is tied to an asset, such as the car you're purchasing, which the lender can repossess if you fail to make repayments. An unsecured loan isn't tied to any collateral and typically has higher interest rates.

The deposit amount will vary depending on the lender and your credit profile. Some lenders may offer no-deposit deals, while others may require 10-20% of the car's value upfront. A larger deposit can improve your chances of approval and lower your monthly repayments.

The best loan term depends on your individual circumstances and budget. A longer term will mean lower monthly repayments but more interest paid overall. Aim for the shortest term you can afford to keep interest costs down.

Yes, some lenders specialise in car finance for people with no credit history. You may need to provide additional documentation, such as proof of income or bank statements, to demonstrate your ability to make repayments.

Yes, many lenders offer car finance for self-employed individuals. You may need to provide additional documentation, such as tax returns or business accounts, to prove your income and financial stability.

If you're having difficulty making repayments, contact your lender as soon as possible. They may be able to offer a payment holiday, restructure your loan, or provide advice on managing your debt. Alternatively, seek free debt advice from organisations like StepChange or the Money Advice Service.

More on Car Finance

References

  • [1] Money Advice Service
  • [2] StepChange
  • [3] Experian

Page last updated on: 20/05/2024

Page reviewed by: Shay Ramani

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