If you have a low credit score, you might think that getting car finance is impossible. However, there are still some options available for you to buy or lease a car without paying too much in interest and fees. In this article, we will explore some of the best ways to get car finance with bad credit in the UK.
What is bad credit?
Bad credit is a term that describes your financial history and how well you have managed your debts and repayments in the past. Your credit score is a numerical representation of your creditworthiness, which lenders use to assess your risk level and eligibility for loans and other forms of credit.
There are different credit reference agencies in the UK that calculate your credit score based on different factors, such as your payment history, your current debt level, your available credit, your length of credit history, and your recent credit applications. The most common agencies are Experian, Equifax, and TransUnion.
Each agency has its own scoring system and range, but generally, a higher score means a better credit rating. For example, Experian’s score ranges from 0 to 999, with 0 being very poor and 999 being excellent. Equifax’s score ranges from 0 to 700, with 0 being very poor and 700 being excellent. TransUnion’s score ranges from 0 to 710, with 0 being very poor and 710 being excellent.A bad credit score can be caused by various factors, such as:
• Missing or late payments on your bills, loans, or credit cards
• Defaulting on your debts or going into arrears
• Having a County Court Judgment (CCJ), an Individual Voluntary Arrangement (IVA), or a bankruptcy against your name
• Applying for too many forms of credit in a short period of time
• Having no or little credit history
Having a bad credit score can make it harder for you to get approved for car finance, as lenders may see you as a high-risk borrower who is more likely to default on your repayments. It can also affect the interest rate and fees that you are offered, as lenders may charge you more to compensate for the higher risk.
How to get car finance with bad credit
Despite the challenges of having a bad credit score, there are still some ways that you can get car finance in the UK. Here are some of the most common options:
Personal Contract Purchase (PCP)A PCP is a type of car finance that allows you to pay a deposit and then borrow a portion of the car’s value over a fixed term, usually between 24 and 48 months. At the end of the term, you have three options:
• Pay a large final payment (also known as a balloon payment) to own the car outright
• Return the car to the lender and walk away
• Trade in the car for a new one and start a new PCP agreement
A PCP can be a good option for people with bad credit because it usually has lower monthly payments than other types of car finance, as you are only paying for the depreciation of the car rather than its full value. This means that you may be able to afford a newer or more expensive car than you would otherwise.
However, there are also some drawbacks to consider:
• You will not own the car until you make the final payment, which can be quite large
• You will have to pay interest on both the loan amount and the final payment
• You will have to stick to certain mileage and condition limits during the term, or else face extra charges
• You may end up paying more in total than if you bought the car outright or used another type of finance
Hire Purchase (HP)
An HP is another type of car finance that allows you to pay a deposit and then make monthly payments over a fixed term, usually between 12 and 60 months. Unlike a PCP, you will own the car once you have made all the payments, plus any fees.
An HP can be a good option for people with bad credit because it is simpler and more straightforward than a PCP. You do not have to worry about mileage or condition limits, final payments, or trading in options. You also have more flexibility to sell or part-exchange the car at any time during the term.
However, there are also some drawbacks to consider:
• You will have higher monthly payments than a PCP, as you are paying for the full value of the car rather than its depreciation
• You will not own the car until you have made all the payments, which means that it can be repossessed if you miss any payments
• You may end up paying more in interest than if you bought the car outright or used another type of finance
Car loan
A car loan is a type of personal loan that you can use to buy a car outright. You can apply for a car loan from a bank, a credit union, an online lender, or a specialist car finance company. You will then have to repay the loan amount plus interest over a fixed term, usually between 12 and 60 months.
A car loan can be a good option for people with bad credit because it gives you more freedom and control over your car purchase. You can choose any car that you want, from any dealer or private seller, and negotiate the best price. You also own the car from the start, which means that you can sell or part-exchange it at any time.
However, there are also some drawbacks to consider:
• You will have to pay for the full cost of the car upfront, which can be difficult if you do not have enough savings or a large deposit
• You will have to pay interest on the loan amount, which can be higher than other types of car finance
• You will have to pay for the car’s maintenance, insurance, tax, and MOT yourself, which can add up to a lot of expenses
How to improve your chances of getting car finance with bad credit car loan
If you have a bad credit score, you may face some challenges when applying for car finance. However, there are some steps that you can take to improve your chances of getting approved and getting a better deal. Here are some tips:
• Check your credit report and score before applying. You can get a free copy of your credit report from each of the three main credit reference agencies once a year. You can also use online tools and apps to check your credit score for free. This will help you to understand your financial situation and identify any errors or issues that may affect your credit rating.
• Improve your credit score as much as possible. There are some simple ways that you can boost your credit score over time, such as paying your bills on time, reducing your debt level, using less than 30% of your available credit, and avoiding making too many credit applications in a short period of time.
• Save up for a larger deposit. The more money you can put down as a deposit, the less you will have to borrow and the lower your monthly payments will be. This will also reduce the risk for the lender and show them that you are serious about buying a car.
• Find a guarantor or a joint applicant. If you have a friend or a family member who has a good credit score and is willing to co-sign your car finance agreement, this can improve your chances of getting approved and getting a lower interest rate. However, you should be aware that they will be legally responsible for making the payments if you fail to do so, which could affect their own credit rating and relationship with you.
• Compare different lenders and deals. Do not settle for the first offer that you get or accept the dealer’s finance without shopping around. You may be able to find better deals from other lenders who specialize in bad credit car finance or who offer more flexible terms and conditions. You can use online comparison tools and brokers to help you find the best options for your situation.
• Choose a cheaper or older car. The more expensive or newer the car is, the more you will have to borrow and the higher your monthly payments will be. This will also increase the risk for the lender and affect the interest rate and fees that they offer you. Therefore, it may be wise to opt for a cheaper or older car that meets your needs and budget.
Conclusion
Getting car finance with poor credit in the UK is not impossible, but it may require some extra effort and research. You should check your credit score and report before applying, improve your credit rating as much as possible, save up for a larger deposit, find a guarantor or a joint applicant if possible, compare different lenders and deals, and choose a cheaper or older car.
