Getting car finance with a bad credit rating
Last Modified 10th of August 2021
While the news has contained some rather interesting stories recently about people who have tried to outwit the banks, when it comes to credit, for most of us, credit terms will be determined for us by the lenders.
What’s your score?
When it comes to offering credit, the thing that interests potential lenders is the borrower’s ability to repay the loan. That’s why, when you apply for any car finance, the lender is sure to check out your credit rating. Put simply, if you have a history of defaulting on loans or failing to pay bills, this will reduce your credit score. Similarly, if you have no credit history at all (for example if you have never taken out a loan, never had bills in your name or a credit card), you may also have a very low score, simply because lenders will have little or nothing to base their decision on.
So now what?
If you have a bad credit rating but need to borrow money to purchase a car, what can you do? Actually, you have quite a few options. In all likelihood, you will end up paying more to borrow money than somebody with better credit (not always, though),but there are probably people out there who will lend to you.
You can ask a bank, although these are among the most stringent lenders of all now. However, if you have a long term relationship with a bank and can explain any past repayment problems to them, while showing them what you have done to improve your credit-worthiness since, you may be able to borrow from them.
Another option is to apply for specialist car finance. Some car finance lenders are willing to look kindly upon those who apply for car finance with bad credit, but they will generally require you to put down a reasonable deposit on any car that you buy – anything between 15 and 20% is not unusual. While many lenders will ramp up the interest payable on a loan if you are deemed a bad credit risk, do remember that what makes somebody ‘bad’ with regard to credit can be open to interpretation and different applicants with the same credit score may have very different lending outcomes, depending on their personal circumstances and the lenders involved. In some cases, a person who is a bad risk to one company may not be seen as risky by another.
If, after trying these options, you still find it hard to get credit then you may consider asking a friend or relative to act as a guarantor. This means that they promise the lender that, if you default on the loan repayments, they (the guarantor) will pay them for you. This can be worth considering if you are sure that you will be able to meet the repayments. For example, if you have a low credit score only because you are young and have little credit history, but it can be a high risk option. If you fail to pay, the guarantor will have to and that can have very serious effects on your relationship with that person, which may last long after the car you buy has gone.