Car finance with bad credit

Find affordable monthly repayments despite a poor credit score: car finance with bad credit

BuyaCar team
Apr 5, 2019

Looking for car finance when you have bad credit can feel like a lonely endeavour.

The advertised interest rates and some incentives suddenly disappear when credit checks are carried out, so the cost of borrowing can rise sharply.

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 a customer defaulting, so they raise the interest rate and remove options such as no-deposit finance.

So bad credit usually results in higher finance costs.

We’ve got more information on car finance with bad credit below, along with ways of making finance affordable, and improving your credit score.


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, 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, it does have the advantage 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

Thisis common because it offers low repayments and flexibility at the end.

The payments only cover the value that the car is expected to lose during the agreement, which enables you to simply return it at the end and walk away (although charges for exceeding the agreed mileage or excess damage do apply).

You’re also able to buy the car at the end, for its remaining value by handing over the cash or refinancing.

In some cases, the car will actually be worth more than the cost of buying in. By trading it in, you can release this difference, which can be put towards a new car or returned to you. More details

Hire Purchase finance

This is better if you’re looking to own your vehicle for several years. The higher monthly instalments cover the full cost of the car, so you’ll own it once the final payments have been made. More details

It's also worth looking at the cost of a bank loan.

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 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 it’s bought.

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

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

There’s some advice on improving your credit score below, but if even you’ve tried everything and still have a relatively low rating, there are other ways of reducing the cost of car finance.

As well as the monthly payments, it’s also worth comparing quotes using the figure for the total amount payable. This includes interest and fees, and will illustrate the cost of agreeing a longer repayment term, for example.

  • Buy a car that holds its value well
    Monthly repayments for PCP finance are based on the difference in the price of a car when you buy it and its expected value at the end. So a car that retains its value well will often cost less per month - watch for higher interest charges 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 interest that you pay (because you’re borrowing less money). Higher deposits can also result in a lower interest rate, as this reduces risk 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.

  • Buy a cheaper car
    It’s obvious, but easy to forget if you’re focused on cars that hit your monthly 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 put down a larger deposit or pay the car off quicker, reducing your interest charges.


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 twenties, can find themselves with a low credit score through no fault of their own.

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

And if they have 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 there isn’t 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 a credit score for car finance

Lenders rate customers with a strong credit history, who are in a stable situation, as the lowest risk.

So you can ensure that you’re presenting the best possible picture by registering 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.

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