Van finance with bad credit

Need a van but worried a bad credit rating will ruin your chances of getting finance, or double the cost? Fear not, you have several options

John Evans
May 17, 2021

Financing a van is a case of chicken and egg. You need a van to earn the money to finance it but chances are that you need the finance to get the van in the first place. That’s fine if you have a good credit rating but what if yours is less than rosy?

Fortunately, not all is lost. Whereas in the past your bank manager may have shown you the door, these days lenders are much more flexible and helpful. You may pay a higher interest rate for having a bad credit rating but in time, as you make your payments and get things back on track, you should be able to improve your credit score and finance will become cheaper in future.

Before we get started, you might want to know more about the world of car and van finance. With options such as PCP finance and Hire Purchase providing their own sets of pros and cons, being clear on which one best suits your needs can simplify your decision making further down the line.

Another option is Lease Purchase, which is a more van-orientated option than PCP finance, which is the most popular option available on cars. As with PCP you benefit from low monthly payments, but in this case you have to make the final payment to buy the vehicle.

Our collection of finance guides will give you all the information you need to make up your mind. Click below for all the details:

What is a credit rating?

This is a measure of your personal and financial status that lenders use to determine what sort of lending risk you represent and how likely you are to pay them back. It’s calculated by credit reference agencies who hold details of your financial transactions, and formal financial arrangements and relationships including loans and mortgages, joint accounts, and mobile phone contracts.

Your record in repaying loans and managing accounts is a key factor in determining your credit score. But there’s another factor, too. It’s more personal and concerns things such as whether you are recorded on the electoral roll and therefore deemed to be at a settled address, and whether you have any county court judgements for non-payment of fines and debts recorded against you.

What is a bad credit rating?

Taking the above factors into account, the agencies give you a credit rating falling into one of five groups ranging from excellent to bad. Someone with a bad credit rating will find it very hard - although not impossible - to borrow money. However, these are quite vague terms and bad could just as easily mean poor - the next group up - in which case your chances are much improved.

Ironically, someone with a bad credit rating may actually never have had credit in the past. The problem is, without a credit history the ratings agencies have little to base their judgement on so err on the side of caution and expect the worst possible situation. Thankfully, if you're in this position, that should mean it's easy to start addressing this.

Can I improve my credit rating?

You can improve your credit rating by getting your finances back on track or building a credit history if you don't have one. Addressing your finances will involve paying off loans, closing accounts you don't use, potentially closing any joint accounts that are shared with someone who has a not-so-good credit record, and making sure you’re on the electoral roll.

Additionally, you'll want to avoid making multiple formal loan applications in your search for a loan because it looks to the ratings agencies as though you are overstretching yourself, applying for loans left, right and centre.

Alternatively, if you have never borrowed money or taken out a contract - including a phone contract - requiring regular payments, do so now and make sure to pay on time every time, in order to establish a credit history that agencies can refer to. Even taking out a credit card that you settle each month will improve your rating.

You have the right to see your credit history and check it for errors. If you find any mistakes you should tell the agency which, if it accepts the error, has 28 days to correct your record.

The challenges of a bad credit rating

If a lender is happy to lend to you, it will be looking to limit its financial exposure - as it sees those with worse credit scores as having more chance of paying late or failing to pay - so is likely to ask that you pay a higher deposit than normal (you’re unlikely to be offered a zero deposit deal). You can also expect to have to pay a higher interest rate than someone with a better credit rating.

You may also find that you aren't able to opt for PCP finance and have to go for Hire Purchase, instead. With Hire Purchase monthly payments are higher than with PCP, but you automatically own the car once you've made all the monthly payments - unlike with PCP, where you have to make a large optional final payment if you want to buy the car.

The reason for this is that Hire Purchase presents less risk because the debt is cleared earlier, as the monthly payments are larger. A benefit for you, meanwhile, is that you would pay less interest with Hire Purchase overall than if you went for PCP and bought the car at the end of the contract.

How to get around these challenges

Consider asking someone to act as your guarantor, that is, a person willing to make your van finance monthly payments if you can no longer afford to. However, they should understand that if you fail to make payments the responsibility falls to them to pay and if they also cannot repay the loan, their credit rating will suffer.

Be prepared that you're likely to have to put down at least 10% of the van’s cash price as a deposit. You’ll reduce the amount of interest you pay doing this, too, compared with paying no deposit. If you need to bring the monthly payments down further, consider going for a longer contract, though bear in mind that you will pay more interest if you do this.

It sounds obvious, but one of the quickest ways to cut your monthly payments and increase your chance of being approved for finance is to go for a less expensive van. At the end of the day, a van is a work tool and if it has all the essentials at a fair price, that’s all that matters.

Adjusting your expectations and going for a less desirable van now, rather than holding out for a more expensive one that you will never be able to get finance on is a wise move. ‘Cutting your cloth’ like this, will also show lenders you are a responsible borrower.

 Van finance with bad credit

Hire Purchase is exactly what it says: you are effectively hiring the van until all the payments have been made, at which point you have purchased it, and own it outright. Because the loan is secured on the van, you will pay a lower interest rate than you would with an unsecured loan.

Interest charges are lower overall than with PCP finance, although monthly payments are high because those instalments cover the whole value of the van, rather than PCP which presents a large 'optional final payment' once you've made all the monthly payments if you want to own it. If you miss your repayments with Hire Purchase - as with PCP - the van can be seized, depending upon how many payments you've made.

Hire Purchase suits people who have no plan to immediately replace the vehicle at the end of the loan or don’t wish to be tied to mileage and condition restrictions. Remember, though, that as you will own the van at the end of the contract, that you can never guarantee what you'll get for it, if and when you come to sell. Should its value plummet and you need to sell, you might not get much back.

This may not matter to you if you’re going to keep it for a long time, but if you plan to part-exchange it for a newer model, its reduced value may be a surprise that you cannot afford. Hire Purchase is popular with lenders providing vehicles to people with a bad credit rating, because the loan on the van is repaid relatively quickly, reducing their debt exposure.

Lease Purchase is a form of finance that works like PCP finance, with low monthly payments and a large final payment needed to take ownership. Unlike with PCP, though, you have to make this final payment. However, before that point is reached, it is possible to sell the vehicle and settle the outstanding finance or part-exchange it for a replacement model, using any equity in it (should the value of the van be greater than the total of the remaining payments) as a deposit.

This method is popular because it’s a way of keeping monthly payments low, although it’s worth bearing in mind that you are paying interest on the whole cost of the vehicle, so this isn't the best value way to buy a van - Hire Purchase costs less overall. Lease Purchase, however, is popular because you know exactly what it will cost to buy the van at the end of the agreement, making for easier budgeting.


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