Struggling with a poor credit history doesn’t have to prevent you from getting behind the wheel of a car. Although obtaining car finance in the UK may pose challenges with bad credit, viable options are still available to help you secure a car.
At CarMoney, our team of car finance Ninjas have put together a helpful article to guide you through the journey of car finance with bad credit. Want to learn more about credit scores? We have a comprehensive guide to help you understand the details.
What is Considered Bad Credit?
In the UK, there is no single definition of “bad credit” with a strict cut-off score. The three leading credit reference agencies (Equifax, Experian and TransUnion) use slightly different scoring systems.
According to Experian and Equifax, a credit score of 300 to 579 would be considered bad credit, falling under the Poor and Very Poor categories.
On the other hand, TransUnion considers a credit rating of 300 to 600 to be in the bad credit range.
However, it’s important to remember that these ranges are just general guidelines. Lenders will evaluate your creditworthiness based on your entire credit report, not solely on your score. This assessment includes factors such as late or missed payments on loans or credit cards, County Court Judgements (CCJs), defaults on accounts, and how much credit you’re currently using.
What finance options are available for poor credit?
Bad credit can make financing a car more challenging, but options are still available. Here’s a breakdown of some common approaches:
Bad Credit Car Loans:
These loans are designed for borrowers with less-than-perfect credit histories. Be prepared for higher interest rates and shop for the most competitive offer.
Dealerships Specialising in Bad Credit:
Some dealerships cater to borrowers with bad credit. They might have lenders or brokers who can approve you, although interest rates might be higher.
Hire Purchase (HP):
This is a popular option for bad credit car finance. With HP, you spread the cost of the car over the loan term, but the lender retains ownership until all payments are complete.
Guarantor Car Finance
With guarantor car finance, a trusted individual (your guarantor) agrees to be responsible for your loan if you’re unable to repay it. This can help you secure a loan even with a bad credit score.
Still unsure about financing? We have you covered with a comprehensive guide you can check out.
Exploring Soft Search for Finance Application
Try a lender’s soft search tool before applying for a loan. It’s a quick way to see if you might be approved. These tools enable you to view potential loan options without affecting your credit score.
Here’s how it works:
Soft Search Pre-Qualification: Many lenders provide a pre-qualification process that uses a soft credit check. This check gives you a preliminary assessment of your eligibility for car finance based on basic information like income and employment. It won’t appear on your credit report and won’t harm your credit rating.
Complete Loan Application: Once you’ve found a lender through the soft search pre-qualification and are satisfied with the potential terms, you can proceed with the entire application. This will involve submitting detailed information, including:
– Personal details: Full name, address, national insurance number, etc.
– Employment details: Employer information, position, income details.
– Supporting documentation: Pay slips, bank statements, tax returns,
Underwriting and Loan Approval: The lender will then review your complete application, including the information you provided and the results of a hard credit check (with your permission). Based on this comprehensive review, they will decide on your loan approval and provide a final loan agreement with all the terms and conditions.
What Difficulties Could you Encounter with Bad Credit?
Higher Interest Rates: Lenders consider borrowers with bad credit to be at higher risk, so they offset this risk by offering higher interest rates. This means paying more for the total cost of the car.
Limited Loan Options: You may not qualify for the most favourable loan terms, such as more extended repayment periods with lower monthly payments. You may also not be accepted for personal car loans or car leasing.
Smaller Loan Amounts: Your credit score may restrict the amount you can borrow, limiting the selection of cars you can afford.
What Solutions are Available to Overcome these Issues?
Improve Your Credit Score: This takes time and effort but is the most impactful strategy. Reviewing your report for errors and correcting them boosts your credit score. Additionally, focus on making on-time payments for all your bills and working to pay down existing debt.
Save Up for a Larger Deposit: The bigger your down payment, the smaller your loan amount. This not only strengthens your application in the eyes of lenders, but it could also lead to a better deal with a lower interest rate.
Choose a Used Car: Opting for a reliable used car instead of a brand new one will significantly reduce the overall cost, making the loan more manageable.
Explore Subprime Lenders: While these lenders can work with borrowers with bad credit, the interest rates may be less favourable.
Get a Co-signer: Getting someone with good credit to co-sign can open doors for loan approval and potentially better rates. However, co-signing is a serious commitment. On-time payments are crucial, as missed payments can damage both your credit and theirs.
Don’t Let Bad Credit Stall Your Drive!
While bad credit can present challenges, it doesn’t have to be a roadblock to car ownership. By understanding your options, exploring lenders with soft search tools, and taking steps to improve your credit score, you can secure the financing you need.
