Car finance with fair credit

If you have an average credit score – not brilliant, and not awful – here’s our guide to what you can expect from car finance

John Evans Matt Rigby
Apr 30, 2022

After a home, a car is likely to be the most expensive thing in your life. Because of this, most people need to borrow money in order to finance one. And as long as you’re comfortable and confident that you’ve budgeted for the cost of monthly payments, this is no bad thing.

In fact, accessing a better, newer or more reliable car with borrowed money could well be a more sensible move than running an older, run-down model that you can’t rely on and that could cost you thousands in repairs and maintenance.

If you’re borrowing money, the way lenders work out how much of a risk you are is via your credit score. The better it is, the lower the interest rate you’ll be able to get, and the worse it is, the more finance will cost you, as lenders will see you as a greater risk. But if, like many people, your credit score sits somewhere in the middle, what should you do?

One answer is to opt for a deal with monthly payments that don’t stretch your budget - that is, one that will be relatively easily affordable compared with your monthly income and other outgoings. Do that and you have every chance of finding a good deal. Yes, you'll pay a bit more interest than those with the highest scores, but you should also have much less interest to pay than those with a poor credit score.

Whether you'll be approved for finance on the car you want comes down to your credit rating, which plays a large part in determining whether you'll be approved for finance and, if so, how much interest you have to pay. Everybody should have a credit score. This is a rating held by bodies known as credit reference agencies.

Keep reading to understand what having a fair credit score means and what you can do to improve your credit rating, to boost your chances of getting car finance and cut down the amount of interest you're charged. Meanwhile, there are several steps you can take to find out whether your credit score is high enough for car finance, or to build a credit history, if you don't already have one.

What is a credit score?

This is a number that lenders use to understand what level of risk a borrower represents - essentially the likelihood of a company getting its money back from an individual. Someone who has a good record of borrowing money and paying it back on time and in full can expect to have a strong rating. Meanwhile, someone who has fallen behind with payments a number of times can expect to have a low score.

Credit ratings are calculated by organisations called credit reference agencies. There are three main ones: Experian, Equifax and TransUnion. Each uses slightly different scales to classify the risk that borrowers pose. However, they are all trying to gauge the same thing - how risky are you and what chance is there that you'll pay any money you borrow back? Lenders feed their ratings into their own calculations to establish whether the company should lend you money or not.

While some lenders focus on the people with the highest credit scores, others target those with lower ratings. If you have a fair credit rating you should be able to take advantage of lower interest rates than people with a lower score, but are likely to have to pay more than those with perfect credit histories.

How is your credit rating calculated?

It’s calculated with reference to many factors, both financial and personal. Among the many things the agencies feed into their rating calculations are your current borrowing commitments and repayment record (note that things you pay for monthly including your mobile phone and insurances are also classed as loans here), the number of credit cards you hold, plus how long you have held and how you manage your bank account.

It may come as a surprise to know that having little financial history can adversely affect your rating because the agencies have less evidence to go on, so they assume the worst. If you have no credit history, however, don't worry. It is possible to build a credit history, though it may take several months to do so.

Meanwhile, at a personal level, the agencies consider your employment status (whether you're employed, self-employed or unemployed), your address and the length of time you’ve been there, whether you are on the electoral role - and therefore settled and easily traceable - and if you have any county court judgements (CCJs) against you for non-payment of fines and debts. Being in a financial partnership with someone with a bad finance history will also be taken into account. If their credit score is worse than yours, it can pull yours down.

Why does a credit rating matter?

Your credit rating is the single most important piece of evidence a lender has to gauge your ability - or inability - to repay a loan. After all, they don’t know who you are or how trustworthy you may be, which means they have to rely on this type of data.

You could claim to be the most honest and financially responsible customer they have ever encountered but without evidence to support this, a lender has to assume that you're just as likely to miss a payment than anyone else.

What is a fair credit rating?

The finance industry classifies borrowers according to five ratings groups to show what kind of a risk they are. These bands vary from bad to excellent. Roughly speaking, each group accounts for around 20% of borrowers, although those judged to be good (one down from excellent) account for around 25% of the total.

The fair category sits in the middle, between those with poor credit scores who may have a history of failing to make monthly payments and those in good or excellent categories, who are likely to have plenty of evidence of borrowing money in the past and paying it back on time.

For credit reference agency TransUnion, someone judged to have a fair rating has scores ranging from 566-603, while for Equifax the range is 380-419 and for Experian, 721-880. As the numbers vary, it's worth focusing instead on the band you fall into, to gauge how to approach getting car finance.

Someone judged to have a fair credit rating sits between those judged to be poor (one up from bad) and those judged to be good. They are certainly in a better position to borrow money than the former and likely to be able to access lower interest rates, but not in such a strong position as the latter.

What are the benefits of a fair credit score?

Unlike someone with a poor credit rating, your chances of being approved for a loan are higher and you are less likely to have to pay a fee or a large deposit. You may be offered a lower interest rate, too, reducing the total amount you have to pay back.

On that point, don’t underestimate the capacity for lenders to change rates according to the type of risk they think you represent - even within the same credit rating band. For example, two brothers of similar ages, both employed and registered at the same address, could apply for a loan for the same amount, but one might get an interest rate of 7.9% and the other 3.4%.

The brother offered a lower rate could simply have a more extensive financial record including renting, a phone contract in his own name, a credit card, monthly utility bills and so on. This clear track of borrowing money and paying it back provides borrowers with more confidence and in turn, they may offer a better rate.

How can I raise my credit rating from fair to good?

The good news about credit ratings is that you can change yours. This can be by actions that show the reference agencies you are a responsible borrower. This could include closing any dormant bank accounts and surplus credit cards, avoiding making multiple loan applications in a short space of time, clearing existing debts, making loan payments on time, closing any joint accounts shared with people with low credit scores and making sure to be on the electoral roll. These don't make a difference overnight and can take a few months to filter down.

You also have a right to see and check your credit record. It can be accessed for free directly through the ratings agencies. Challenge any errors you find, ensuring the agency issues a notice of correction. It has 28 days to update its report or explain why it believes it is accurate. Together, these steps may get you from a fair to a good credit rating, in the process increasing your borrowing capacity and reducing your borrowing costs.


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