What is very poor credit car finance?

Having very poor credit can be a barrier to car finance. Here’s what it means and what you can do to avoid it

Sam Naylor
Dec 10, 2020

A very poor credit rating isn’t the end of the world, but it’s certainly something to be concerned about if you are considering purchasing a car using borrowed money, as it could make things much more expensive.

If you want a car that’s relatively new then finance may be the only way you’ll be able to afford it, so a credit score that’s very poor could be a barrier. However, there are ways to build your credit score if you have little credit history and different ways to boost your chances of getting approved for car finance.

Lenders use your credit score when considering you for car finance, no matter whether it’s PCP finance, Hire Purchase or any other type of loan. A credit score is assigned to everyone no matter whether they have a history of borrowing money or not - and your rating makes a big difference when you do come to borrow money at any point in your life, whether it’s for a car or anything else.

Here we set out what your credit rating is, what a very poor rating means for you and how it’s calculated. We’ll also delve into how credit scores change the car finance options available to you and the likely costs, and what you can do to avoid or address a very poor credit rating.

What is a credit rating?

Your credit rating is an assessment of your likelihood of paying back money if you take out a loan. You may have heard of one or all of these agencies: Experian, Equifax or TransUnion. These are the firms that work out your credit rating, and each has a website where you can enter your details and find out what your credit score is.

Your credit rating is based on a numerical score given to you based on your financial history and some other factors. The number is then used to place you in a band, from Excellent through to Very Poor, which is the lowest rating (see below).

The band you are in is an indication of how likely it is that you will pay back money lent to you in full and in a timely manner. The more likely you are to pay back money in the eyes of the agencies, the higher your score and the better your chances of being approved for finance with low interest rates.

How is credit score calculated?

The credit agencies use many different factors to work out your score, and each one has its own way of working this out. It doesn’t matter if you have a higher or lower score with one or other of the agencies as lenders can potentially see all of them.

What you need to know is that they look at things like credit card payments, mobile phone contracts or insurance payments to see if you’ve had any issues with repayments in the past. They also look at the number of credit cards you have and other factors to do with your money management within bank accounts.

Taking out lots of types of finance at the same time is a sign that you'll be less able to pay any additional loan and could be financially stretched, so this can negatively impact your score. 

Your employment status is also taken into account, plus how long you’ve lived at your home, if you’re registered to vote or not, and any legal action against you for failing to pay fines or debt in the past.

What is a very poor credit rating?

The bands that credit agencies use to group individuals' credit scores are Excellent, Good, Fair, Poor and Very Poor - so as you can see, a very poor credit rating is as bad as it gets, right at the bottom of the scale. As you also have a numerical score, though, you could be close to stepping up into the ‘Poor’ bracket or right at the very bottom of the scale with an extremely low score.

Lenders will be able to see which band you are in when considering you for a loan, whether that’s for a traditional loan, PCP car finance or Hire Purchase - any kind of finance. Your score helps lenders to assess whether to lend you money or not. Those with the lowest score may be the least likely to be approved for finance with traditional lenders, though other finance companies may cater for those with the lowest credit ratings with specific products.

The most likely reason people may find themselves in the very poor category is because they have a history of missing finance payments or a large amount of debt. There are some other causes but they will have a smaller impact on the score than these.

Having a joint bank account with someone who has a low credit score is another potential reason, as this can drag down your score as well. Those who have never borrowed money, meanwhile, may also find themselves in this category, as lenders have no evidence of them borrowing money and paying it back, so they tend to assume the worst case scenario. However, it’s fairly easy to start building a good credit score when you have no credit history.

Can you get car finance with very poor credit?

Lenders want to know when they’re considering offering a car loan or car finance how likely it is that you will pay back all of their money on time. Managing this risk is their job - and they use all the tools they have to do it, the main one being your credit score.

With a very poor rating, you may find that many lenders will refuse to offer you car finance. Some may consider you with a few conditions, as long as the amount you are asking for is reasonable to them. This means that the cheaper the car you consider, the more likely you are to be approved if you have very poor credit.

Options available to the lender could include offering you a loan with a high interest rate - as this means they get more money back sooner, to cover their increased risk of you failing to make payments on time or in full - so you’ll have to pay back more than those with a better credit rating. Lenders could also ask you for a bigger deposit than they might otherwise or only give you finance on a cheaper car, to reduce their risk.

Can you improve your credit rating?

The good news for anyone with a very poor credit rating is that you can improve it. There’s no overnight fix, as the only way to bring up your score is to keep making payments on time consistently to prove to lenders that you can be trusted to do so. The longer you can keep up payments in full for all your financial commitments, the better your score will get.

Any bank accounts that you’re not using should be closed down, and the same goes for credit cards and joint bank accounts if the other person doesn’t have good credit. Registering to vote can help if you’re not already on the electoral roll.

As you keep making payments and start to clear away debt, your credit rating should rise. Just remember to keep these good habits up even if you get back to a better score in the future, as you'll need to maintain this score.

It is also possible to challenge the credit agencies if you spot an error, for example a recorded missed payment that you actually paid on time. The agencies have to check this and remove it if it’s a genuine mistake, which could help you to improve your credit score and be able to take advantage of better deals.


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