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Having a bad credit rating doesn’t have to mean you can’t get car finance. Below we go through your options and offer some hints and tips to help you get a good deal…
There are a lot of people out there who have a poor credit score, and there are also a lot of misconceptions about what you can and can’t do if your credit history is rated as bad. Many people believe that they can’t get a car finance deal if they have a bad credit score, but that is no longer the case.
There are a lot of car finance companies who specialise in offering packages to people with bad credit scores. However, the downside is that the interest rates on offer can often be quite high.
Indeed, a recent study by credit rating company Clearscore found that 1 in 3 people in the UK buying a new car on finance could be spending at least £10,000 more simply because they have a bad credit score – with some interest rates as high as 30%. It is therefore a good idea to take your time and weigh up your different options before rushing to sign up to a finance deal.
What is a bad credit rating?
A bad credit rating can be the result of serious financial issues such as bankruptcy or County Court Judgements (CCJs) as well as more ‘trivial’ things like missing credit card or mortgage payments.
As there are so many different variables at work when it comes to calculating your credit score, being deemed ‘bad credit’ isn’t necessarily ‘bad’. Credit scores can be used in different ways by lenders and are seen as relative – so just because you have been deemed a high risk by one lender doesn’t mean all lenders will view you the same way, as many use different criteria.
Therefore you might not have to go with a specialist ‘bad credit car finance’ deal (and pay the high interest rates), as a normal finance company may not judge you to be a high risk.
It’s also worth noting that lenders tend to be more stringent in terms of financial risk the bigger the loan gets, so if you are turned down for a mortgage because of your credit rating it doesn’t necessarily mean a car finance company will also reject your application.
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Applying for car finance with a bad credit rating
While it’s true that some lenders may turn you down for credit while others will accept you, you shouldn’t just apply to as many companies as possible to see which ones approve you and which don’t.
If you are declined for credit a number of times then it can actually contribute to you having a poor credit rating, so if you think you may be at risk of being declined you should spread out your applications over time and only apply to lenders you would definitely borrow from if approved.
You can also check your credit score yourself before you submit an application for car finance. The results of your check might not guarantee you will be approved or declined – as lenders have their own set of criteria – but it will give you a good idea of how you are likely to be viewed by the lender.
Most of the top credit checking companies like Experian and Clearscore can make a ‘soft’ check on your credit history which doesn’t show up when a lender makes the full ‘hard’ check when you apply.
It’s also a good idea to check your credit score before applying for a loan or car finance. While the results won’t guarantee you’ll be approved or declined, they’ll give a fair indication of the likely outcome.
Also, if you have any loans or credit cards outstanding then you should aim to have these paid off in full before you apply for car finance. There is also the option to have a friend or family member act as a guarantor to help you be a less risky proposition for lenders.
If you have decided that car finance is the way to go, then your starting point should be to use a car finance calculator to work out how much your monthly repayments might be.
However, there are some other alternatives to car finance that might prove to be a better option for you…
Pay in cash
If you’ve got the money for a new car at your disposal then there’s every chance that paying in cash is the best option.
Most dealers will offer some form of discount if you pay in cash, which also has the benefit of meaning you don’t have to worry about meeting monthly payment amounts or interest rates.
Take out a personal loan
There are a lot of specialist lenders who offer loans specifically for people who are looking to buy a new car – often with better interest charges than other loan providers.
Purchasing a car this way means you own it outright straight away, so you can sell it before the end of the loan period if you want/need to.
You will be charged interest though, which is the price you pay for being able to spread the cost of a new car over monthly repayments – and if your credit rating is bad then you could find the interest rate to be too high.
Get a credit card
With all the different credit card offers out there it could be a good option to put the cost of your new car on a credit card.
With a credit card you can spread the payments, and depending on the card you could enjoy up to three or four years interest free.
Another benefit is that your purchase will automatically be covered by the Consumer Credit Act, which means that the card issuer carries equal liability if there is a breach of contract or misrepresentation in the sale. So you basically have a better chance of getting your money back if you are sold a dud.
Not all car dealers accept credit cards though, and the ones that do tend to charge handling fees, so make sure you check this beforehand.
You’ll usually have to pay a deposit of approximately 10% with hire purchase. Then there are the monthly instalments which tend to run from one to five years.
The loan will be secured against the car, so you will not own the vehicle outright until you make the final payment. Subsequently, if you fall behind on your repayments then the lender can take the car away.
You might be able to borrow more via a hire purchase agreement than through a personal loan, however you can’t sell the car until the loan is fully repaid.
Personal Contract Purchase (PCP)
Similarly to hire purchase with a PCP you will have to paya deposit of around 10%, and will be require to meet monthly payments. That’s where the similarities end though.
Your monthly payments will be a lot smaller with a PCP – by the time you get to the end of the deal, you will have paid off around a third of the cost of the vehicle.
At that point, you have three options. You can make a final, large payment and take ownership of the car. Or you can hand the car back and walk away.
The final option is to use the value of the car you have been paying for towards a deposit on another car.
Be warned, these contracts will impose a mileage limit – if you breach that limit, there will be penalties to pay.
However, a PCP does mean you can drive a new car every few years, without ever actually owning it.
If you lease a car, you get to drive it for an agreed period and a set number of miles.
There is a fixed monthly cost, which generally includes servicing and maintenance costs.
You are just renting the car though – you never own it. There will be penalties for exceeding the mileage limit, and possibly extra fees for any damage or wear and tear.
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