How to secure car finance with bad credit

Looking for affordable monthly payments, but have a poor credit score? Bad credit car finance is what you need

BuyaCar team
Sep 27, 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.

This is typically down to 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 take away options such as no-deposit finance in an attempt to recoup their money as quickly as possible.

As a result, having a bad credit score usually results in you facing 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 - PCP finance and Hire Purchase - are often available to customers with lower credit scores, 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 provided, 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, placing a deposit does give you the benefit of reducing your monthly payments, too.

This makes it all the more important to compare quotes. Some retailers, such as BuyaCar, work with a panel of lenders to improve your chances of getting a competitive offer, as even if several finance companies won't lend to you, there will often be one or two that will.

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 of the contract - if you want to buy the car you can, but if you don't, you can simply hand the car back.

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 making a lump say payment or refinancing.

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

More details about PCP finance

Hire Purchase (HP) finance

Hire Purchase makes more sense if you’re looking to run the vehicle for several years and want to own it at the end of the contract, because you should end up paying less interest overall. As there is no large optional final payment - as with PCP finance - the monthly instalments are a little higher.

However, the monthly payments cover the full cost of the car, so you’ll automatically own it once the last monthly instalment has been made, without having to find cash for the large optional final payment - which is often up to around half of the car's initial value - 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. As you own the car from day one with a bank loan, though, you are free to sell the car at any time - if, for instance you could no longer afford it, or your situation changed and you needed a larger car.

Leasing is generally not available to drivers with a bad credit rating, so if you have a less-than-perfect credit score and want the lowest monthly payments, PCP finance is likely to be a more realistic option.

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.

That's because providing car finance with no deposit is seen as a larger risk for lenders because they'd be lending all the 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 would lose money if you missed payments in the first year or two. The reason for this is that even if the car is seized and sold, the proceeds - plus any payments that were made - may not cover the full value of the finance.

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


Cheap car finance with bad credit

Keep reading for tips on how to improve your credit score below. Even if you’ve tried everything and still have a relatively low rating, though, 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, if you want to own the car at the end of the contract.

This figure includes interest charges and fees, and will clearly show you the cost of agreeing a longer contract length, 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, for instance.

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. If in doubt, get like-for-like finance quotes, with the same deposit, contract length and mileage allowance and you'll see which options offer the best value.
  • 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 the total you have to pay in interest - particularly if you choose a finance scheme with a high interest rate. Some drivers use PCP finance to effectively rent a car, returning it at the end and then choosing another car on a new PCP agreement. In this case, you’ll generally spend less per month by keeping the same car for longer periods, although if you want the lowest overall cost with Hire Purchase or PCP, the shorter the contract, the less you'll pay overall, as less interest mounts up.
  • 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 car with more kit or a better engine, for instance or allow you to 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 as a result, won't have been able to build a strong credit score.

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 on previous finance 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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