How to get car finance with bad credit

  • Bad credit doesn't mean you can't finance a car
  • HP agreements are the easiest to get
  • Interest rates worse for people with poor ratings

Kia Sorentos

Lenders perform credit checks to see if applicants meet their requirements. Whether that's with a PCP (Personal Contract Purchase), HP (Hire Purchase) or PCH (Personal Contract Hire) agreement, your credit history and score will be researched if you're applying for car finance.

If your credit rating doesn't meet the lender's requirements, you're rejected - usually immediately.

This is why credit ratings are so incredibly important. It's also why if you have bad credit, you'll struggle to get car finance and you most likely won't be eligible for 0% APR deals.

The reason a lender performs a credit check is to make sure you can afford the monthly payments. People with excellent credit scores have demonstrated a firm grasp of their finances. They haven't missed payments, have unbroken employment records, and don't have CCJs (Country Court Judgements) against them.

Generally, those with poor credit scores have missed payments in the past, and don't have a lot of wiggle room in their monthly outgoings.

People who haven't taken out a bank account are also assigned a poor credit score because there's no record of them and their finances.

While those who haven't taken out a finance agreement before will have something called a 'thin' credit history. Lenders don't know about their history of paying off credit, so they have to assume the worst.

People with poor credit scores are less likely to be accepted for car finance then. But it's not impossible.

This article focuses on getting a car with a PCP or HP style finance agreement. If you have bad credit and you want to lease a car, read: the Parkers guide to bad credit car leasing

>> Search for car leasing deals

How to get car finance with bad credit

No matter if you're searching for a Volkswagen Golf or a Ferrari 812 Superfast - PCP and HP finance agreements are generally easier to get with poor credit than leasing. This is because you're only financing a portion of the car's total cost.

Out of the two, HP schemes are the easiest to get if you have poor credit. This is because the value of the loan is secured against the car. This means that if you miss payments the finance company could repossess the vehicle to settle your debt. 

As the finance is tied to the car, the risk to finance companies is less through HP than if you paid for the car with an unsecured personal loan. As a result, even if you have been turned down for a standard bank loan, you could still be approved for a HP scheme.

Poor credit? There are still options

PCP and leasing deals are harder to get than HP. However, there are variables when taking out a car finance agreement, and changing these can work in your favour.

Choose a lower annual mileage limit

Your projected mileage during the term of the deal is another factor in its cost. By opting for a lower mileage limit, the car will be worth more at the end of the deal, costing you less each month to finance. Be realistic, though, because if you exceed the mileage allowance you've financed you will have to compensate the finance company for the extra wear and tear on the car in the form a penalty that charges you for every extra mile.

Pay a larger deposit

You may have no choice but to pay a larger sum up front but doing so will reduce your monthly payments and the finance company's exposure, improving your chance of getting that deal.

Pay a higher interest rate

You will probably be asked to pay a higher interest rate than the advertised one. It may only translate into a slightly higher monthly payment, though, so don't reject it without checking.

Choose a used car

Depreciation, or the difference between what the car is worth at the start of the deal and what it's worth at the end, is key to the cost of a PCP deal since it's this cash difference that you're financing. New cars lose well over half their value in their first three years and many lose up to 30% in their first year alone. It makes sense, then, to take out a PCP deal on a used car that has already suffered much of its early depreciation. This will mean lower monthly payments that may be closer to what, given your credit rating, the finance company thinks you can afford.

Also if you see a used car on sale with money off, you'll be borrowing less money from your provider. Remember, the less you need to borrow, the higher your chances of being accepted.

If you live in a city, be aware of low-emissions zones. Some places, like London, operate a congestion charge zone and might charge you for entering specific sections if you have a car that produces high CO2 emissions.

>> Search for used cars

Consider total costs

If you're desperately after a new car, and you have bad credit, you may just have to accept that the finance agreement will cost you more money than if you had good credit. One way to keep costs down is by choosing an efficient car with low running costs. Petrol electric hybrids tend to be cheaper to tax and return more mpg than conventionally powered petrol cars. Electric cars can be charged up for just a few quid - plus they offer a relaxed and near-silent electric driving experience.

How to get car finance with bad credit

Improve your credit score

If you have time on your hands, improving your credit score is a sure-fire way to get accepted for car finance. It also makes you eligible for better APR rates, which are reserved for people with high credit scores.

Check your credit rating

You can check your rating for free. There are three major credit reference agencies, called Experian, Equifax and TransUnion. Once you sign up, the first job here is to see if you can spot any errors. If you can, tell the agency. They will have 28 days to look at it, and amend it if necessary.

Get your finances in order

Settle your loans. Close redundant accounts. If you have someone on a joint account who isn't paying their way, get rid. Doing these can drastically improve your credit score. However, the effects can take months to show up.

>> Money Saving Expert: how to improve your credit score

Be wary of guaranteed finance

A number of companies claim to offer 'guaranteed' finance. These generally come with extortionate interest rates that see you paying a huge premium for the privilege of borrowing money.

Knowing that you will be approved might offer you peace of mind, but the more interest you have to pay, the more likely you are to have problems meeting the monthly payments. Don't be swayed by the promise of 'guaranteed' offers – make sure to compare the APR rate with alternatives to see which offers you better value.

Car finance deals if you have low credit:

If you have poor credit, car finance is much more achievable on a car with low monthly payments.

>> The best new cars for £90 per month

>> The best new cars for £100 per month

>> The best new cars for £150 per month

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