Car finance with bad credit - your options

Low monthly payments despite a poor credit score: PCP finance can provide an alternative to car leasing with bad credit

By BuyaCar team

If you're looking for a brand new car, then leasing is one of the easiest ways to get behind the wheel of a desirable model for a reasonable monthly cost. Payments are kept low because you effectively just rent the vehicle - usually for between two and four years. Then, like a holiday hire car, you simply return the car at the end.

Because you're not buying the car, the total amount that you pay over the course of the lease deal is typically much lower than the car's cash price. While with PCP finance you pay the equivalent of how much value the car is losing as you use it, with a lease what you pay is effectively a monthly rental rate to drive the car.

The downside of leasing is that you'll normally need a strong credit rating to be accepted in the first place, and you are left with nothing to show for your payments at the end of the contract. Even if you love the car and want to buy it, that's not normally an option either, though it is with PCP.

Meanwhile, if you have a poor credit rating or just one that's lower than average, then affordable leasing may not be available. However, this doesn't rule out PCP finance, which also provides you with relatively low monthly payments and the option to return the keys at the end of the contract.

As a result, if your credit score is less than perfect and you like the idea of accessing a new car for an affordable monthly payment, PCP finance could be a more viable option than leasing.

Leasing alternatives: PCP finance

Personal Contract Purchase (PCP) offers a similar format to leasing. You make an initial payment followed by a series of monthly payments, but it's available for used cars as well as new models, which means PCP can provide even lower monthly payments than going for a lease deal - leasing is typically only available on brand new cars - and you have a much wider selection of cars to choose from.

The reason PCP payments are lower than an equivalent loan or Hire Purchase deal is that they only cover part of the vehicle's cost - the amount of value the car is expected to lose during the contract - making PCP much more affordable in the short term. At the end of the contract, you can hand the car back and walk away, just like a lease. You can read more about which type of car finance is best in our expert guide.

PCP is more flexible than leasing, though, because you have other options at the end of the agreement besides just handing the car back. You can buy the car for a pre-agreed amount (known as the optional final payment or balloon payment) or if you don't have the cash to hand you can refinance this, either with another PCP finance contract or Hire Purchase where you'd automatically own the car once you've completed this second set of payments. This makes eventually owning a set of wheels more affordable, as the monthly payments should drop when you refinance. You will also own the car at the end, allowing you to keep it with no further monthly payments to make or part exchange it for a newer model.

Meanwhile, with PCP, if the car is worth more than the optional final payment when you hand the keys back then you’ll also be able to 'trade it in' and put this difference - known as equity - towards a deposit on your next car. This, in turn, reduces monthly payments on that car.

Leasing and finance repayments with bad credit

You’re more likely to be accepted for a PCP agreement than leasing if you have a low credit score because PCP is a full finance agreement where interest is charged, which means that lenders can adjust the rate to reflect their risks. 

As a result, interest rates will be higher if you have a low credit score and you’ll normally be required to pay a deposit. This isn’t a bad thing if you have the money: the bigger the deposit, the lower your monthly payments will be and the less interest you'll pay overall.

As with any type of finance or leasing, lenders will check to ensure that payments are affordable, alongside all of your other essential costs, such as rent or mortgage payments. Check out some of the best bad credit car finance deals here.

Affordable PCP finance with poor credit

Your PCP finance payments are based on the amount of value that your car is expected to lose during the contract. So if you choose a car that holds its value well, such as the Mini Hatchback above, then this will reduce your payments compared with a car with the same cash price that is less desirable once it's used - and consequently loses value faster.

The monthly prices shown on BuyaCar are representative examples, based on a typical interest rate; if you’re borrowing with poor credit, then the cost is likely to be higher. This is because those with low credit scores pose a higher risk to lenders and lenders account for this risk by charging more interest.

Meanwhile, if you want to read more about the different types of cars available, check out our used car buying guides. And if you're still struggling to get finance, read our guide to how to secure car finance with bad credit.

Leasing a used car with bad credit

Most leasing arrangements are restricted to new cars, but PCP finance is available for both new and used vehicles that are typically less than four years old. This provides far more options with a greater range of cars to choose from, across a wider price range.

Older models are available to finance, too, but for cars over five years old you’ll normally need to spread the cost with Hire Purchase (HP) finance, which will result in you owning the vehicle once you've completed the monthly payments.

Although you're likely to pay less interest overall on a Hire Purchase deal, and you'll own the vehicle at the end of the contract with the ability to keep it or sell it at that stage, the monthly cost may be out of reach compared with an equivalent PCP deal, unless you opt for a much older model.

Don't see this as a bad thing, though. You can always trade in your car for a new one at the end of the agreement if you want, putting the car's value towards a deposit on your next car, reducing your monthly payments next time around.

Improving a bad credit score with leasing

Successfully applying for PCP finance and making your monthly payments on time should improve your credit score, which may help you to lease a car or take out finance at a lower interest rate in future. Read about fair credit car finance here to see the difference it can make to your chances of being approved and the level of interest you have to pay compared with bad credit options.

Credit scores are meant to reflect the risk that lenders take when they offer you finance, so a strong record of making payments on time will normally result in a higher score, as future lenders can be more confident that you will pay them back on time. If you have a higher score, lenders should reflect this by charging you less interest.

Other factors that affect your credit score include County Court Judgements (CCJs), bankruptcies and the length of time that you have lived at your current address.

The more stable your situation is (for example, living at one address for a long time, having a permanent job and appearing on the electoral roll), the more creditworthy you are likely to be - and the more likely you are to be eligible for lease deals or lower interest rate finance offers.

*Representative PCP finance - Ford Fiesta:

48 monthly payments of £192
Deposit: £0
Mileage limit: 8,000 per year
Optional final payment to buy car: £2,923
Total amount payable to buy car: £11,926
Total cost of credit: £2,426
Amount borrowed: £9,500
APR: 9.9%

BuyaCar is a credit broker, not a lender. Our rates start from 6.9% APR. The rate you are offered will depend on your individual circumstances.