Car finance with bad credit

Affordable monthly payments despite a poor credit score: car finance with bad credit

BuyaCar team
Jul 24, 2019
Car finance with bad credit

Looking for affordable car finance can feel like an impossible feat when you have a bad credit score.

The advertised interest rates and some incentives suddenly disappear when credit checks are carried out, so the cost of borrowing can rise sharply, meaning that the car you're after may suddenly seem out of reach.

It’s typically the fault of credit ratings, which are based on your situation and financial history. Lenders assume that the lower the score, the higher the risk of you missing payments, so they raise the interest rate and remove options such as no-deposit finance in an attempt to recoup their money as quickly as possible.

So a bad credit score usually results in higher finance costs.

Keep reading to find out how to maximise your chances of getting car finance with a bad credit score below, along with ways of making finance costs more affordable, and improving your credit score. Find out more about car leasing with bad credit here.


Car finance options with bad credit

The most popular types of finance are often available to customers with bad credit, on both new and used cars.

If you’re applying with bad credit, though, then you’ll typically find that interest rates are higher than in the representative examples, which reflect the rate offered to most customers. A deposit is also likely to be needed. As this goes towards paying off the finance, however, it does give you the benefit of reducing your monthly payments.

This makes it all the more important to compare quotes. Some retailers, such as BuyaCar, work with a panel of lenders to improve the chances of getting a competitive offer.

Personal Contract Purchase (PCP) finance

PCP finance has been the most popular form of finance for many years, because it offers low monthly payments and flexibility at the end - if you want to buy the car you can, but if you don't, you can hand back the keys.

Monthly payments only cover the difference between the initial cash price and the car's predicted value at the end of the contract - with interest added and the deposit subtracted from the bill - which enables you to simply return the car at the end and walk away with nothing left to pay (provided you stick to the mileage limit and keep the car in good condition).

You’re also able to buy the car at the end, by making the optional final payment - also known as a balloon payment - by handing over the cash or refinancing.

In some cases, the car will actually be worth more than the cost of buying it - with the difference referred to as equity. By financing a new car and effectively trading it in, you can put this equity towards a deposit on a new car, which reduces the monthly payments.

More details about PCP finance

Hire Purchase (HP) finance

This is better if you’re looking to run the vehicle for several years and want to own it at the end of the contract. The higher monthly instalments cover the full cost of the car, so you’ll automatically own it once the final payment has been made, without having to find cash for the large optional final payment or needing to refinance this amount.

More details about HP

You may also want to look into the cost of a bank loan, though if you have a poor credit score, you can expect to pay higher interest rates.

Leasing is generally not available to customers with a bad credit rating.

Bad credit car finance with no deposit

It’s unlikely that no-deposit finance deals will be offered to drivers with a poor credit score.

Providing car finance with no deposit is seen as a larger risk for lenders because they are lending money to cover the full cost of a car - which loses value as soon as you drive it away.

This increases the chances that a lender will lose money if the customer misses payments in the first year or two.

That's because even if the car is seized and sold, the proceeds - plus any payments that were made - may not cover the value of the finance.

As a result, no-deposit finance is generally restricted to buyers with a good credit score.


Cheap car finance with bad credit

Keep reading for tips for improving your credit score below, but even if you’ve tried everything and still have a relatively low rating, there are other ways of reducing the cost of car finance.

Don't just look at the monthly payments when working out whether a finance deal is good value. You also need to take into account how large the deposit is, whether any discounts are offered and comparing quotes using the figure for the total amount payable. This includes interest charges and fees, and will clearly show you the cost of agreeing a longer repayment term, for example. As a longer repayment term means interest builds up over a greater period, you can expect a higher total amount payable with a five-year contract compared with a four-year one.

To find the right deal for you, focus on the following elements.

  • Choose a car that holds its value well
    Monthly repayments for PCP finance are based upon the difference between the price of a car at the start of the contract and its expected value at the end. So a car that retains its value well and depreciates little will often cost less per month than one that might have a lower cash price but loses value quickly. Do watch out for higher interest charges on cars with a higher cash price, though.
  • Adjust the deposit
    If you have the money available, increasing the size of the deposit will reduce your monthly payments, as well as the amount of interest that you pay (because you’re borrowing less money). Higher deposits can also make you eligible for a lower interest rate in some cases, as the more you put down upfront, the less risk you pose for the lender.
  • Extend the agreement
    If you’re really struggling to find an affordable car for a three-year finance term, then most finance agreements can be extended to four or five years, which usually reduces the monthly payments, as you’re spreading the cost over a longer period. This does come with a huge warning, though: you’ll be borrowing money over a longer period, which can substantially increase your interest payments - particularly if you have a high interest rate. Some drivers use PCP finance to effectively rent a car, returning it at the end and choosing another car on a new PCP agreement. In this case, you’ll generally spend less overall by keeping the same car for longer periods, although you’ll need to crunch the numbers to ensure that this is true for you.
  • Choose a cheaper car
    It may seem obvious, but if you're pulled towards pricier cars rather than more affordable models this will cost you more. Consider a couple of different models, however, and you could find one that suits your needs but comes with lower finance costs. This could help you to get a newer model, or a higher specification within budget. For example, you might have your heart set on an Audi A1 (above), which just about fits into your budget, but you could easily cut your monthly payments by £40 by getting a similarly-sized Ford Fiesta of the same age. This might enable you to get a better car or pay the loan off quicker, reducing your interest charges and making you the legal owner sooner.


Car finance for young drivers with bad credit

Not everyone with a poor credit score has been in financial difficulties, particularly if they are young.

Teenage drivers, or those in their early 20s, can find themselves with a low credit score through no fault of their own.

Those who have never taken out a credit card, loan or finance previously, typically won’t have been able to show lenders that they can make repayments on time.

And if you've frequently changed addresses and had no regular employment until recently - not uncommon if you’ve just left education - then your credit score may be weak.

In this situation - where you don't have a history of missed payments - guarantor finance can provide a solution. You’ll need a family member with a strong credit rating who will step in as the guarantor to make your repayments if you fail to do so.

This often results in a lower interest rate, as the quote takes into account the credit score of the guarantor. You’ll also be able to increase your own credit score as you make repayments on time.


Improve your credit score for car finance

Lenders rate customers with a strong credit history, who are in a stable situation, as the lowest risk. These are the people who are typically eligible for the lowest interest rates.

So you can ensure that you’re presenting the best possible case to the lender, make sure you register on the electoral roll.

Living at the same address for several years and having a permanent job also boosts your creditworthiness, although freelancers who can show a regular income stream should also be rated highly.

If you haven’t taken out credit before, then lenders won’t have any evidence that you make repayments on time. Taking out a credit card and using it - even for a few purchases, then paying your bill in full each month, should go some way to building a credit score.

However, you should avoid making several finance or loan applications, particularly if you don’t meet the criteria and are likely to be rejected: these can have a negative impact on your score.

Factors such as County Court Judgements and several missed payments will impact your credit score for several years, requiring you to rebuild your credit profile.

For all the information on how to boost your odds, read our guide to maximising your chances of being approved for car finance.

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