Bad credit car finance

  • 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

Bad credit car finance

When you apply for a PCP (Personal Contract Purchase), HP (Hire Purchase) or leasing agreement, your credit history and score is investigated by the lender.

If your rating doesn't meet the requirements of the lender, you're rejected. Your credit rating is incredibly important.

A lender performs a credit check to ensure you can afford the monthly payments.

If you have an excellent credit score, it means you've demonstrated control of your finances. People with excellent credit scores haven't missed payments, have an unbroken employment record, and don't have County Court Judgements (CCJs) against them.

People with poor credit scores (generally) miss payments and don't have a lot of flex in their monthly outgoings. People with no bank account also have poor credit ratings because they can't demonstrate a record of their finances.

And of course, if you've never taken out any kind of finance agreement, you'll have what is referred to in the biz as a 'thin' credit history. Finance companies don't know a great deal about your credit history, so they have to assume the worst.

Basically: someone with a poor credit score is less likely to be accepted for car credit. However, it is 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, it might be easier. Read: car leasing with bad credit.

>> Search for car leasing deals

Bad credit car finance: how does it work?

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.

Improve your chances of getting car finance if you have a low credit score

How to get car finance with bad credit

PCP and leasing deals are harder to get, then. 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, so costing you less each month to finance. Be realistic, though, because if you have exceeded the mileage, you will have to compensate the finance company.

>> 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.

>> Search for used cars

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 sport 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.

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 bad credit:

If you have bad credit, car finance is much more acheivable 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

Find out more about car finance:

>> What is PCP?

>> What is Hire Purchase car finance?

>> What is PCH?

>> Lease or buy a car? Rent or keep?

>> From our sister website: how to lease a car if you have a poor credit score