When it comes to getting a car on finance, there are a number of factors that can affect how much it costs you. Millions of people are choosing to get a car on finance as their next way to purchase a vehicle. However, each individual will be offered a finance agreement that is completely personalised to their own circumstances. One of the factors that can affect your car finance costs is your credit file and current credit score. It’s a common car finance myth that having a bad credit score means that you pay more for your finance. However, this doesn’t have to be true. The guide below has been designed to explore how credit scores affect car finance rates and the steps you can take to help get the best deal possible.
What is bad credit?
A bad credit score is when you’ve failed to handle borrowed money properly or have a lack of credit history. Your credit score is reflection of your financial handling, and a bad score usually means you’ve missed payment, made late repayments, have high levels of debt or are struggling to meet payment deadlines. Your credit score is calculated by a number of factors and can be found when you check your credit report. There are 3 main credit refencing agencies who assess your credit worthiness. Its worth checking your credit score with all credit referencing agencies as they all have their own credit scoring criteria and what one agency sees as ‘bad’ another may see as ‘good’. Usually, credit referencing agencies put applicants into credit categories such as poor, fair, good, very good and excellent.
How does bad credit affect borrowing?
If you’re looking to borrow money from a lender for a car finance deal or any other form of credit or finance, you will usually have to undergo a credit check first. It can be hard to get car finance without a credit check as lenders want to assess the level of risk. When a lender gives you money for a car, they use your history of making payments on time and in full to see how likely you are to pay your loan back. When you’ve missed payments in the past or have high levels of debt, lenders may decline you if they think you can’t afford to pay back your car loan. Some lenders may approve you for a car finance deal with poor credit, but they can set higher interest rates to help secure the level of risk. Your interest rate offered affects how much you need to pay to borrow money and a higher APR means that you are making car finance more expensive than it needs to be.
How to get a more affordable car finance deal with low credit:
Car finance rates can be higher for those with poor credit, but it doesn’t have to be. With a little careful planning, there can be ways in which you can help get a more affordable finance deal.
Save for a deposit
Some car finance deals do require you to have a deposit to put down before you can get approved so it’s worth knowing before you start applying. However, putting more down for a deposit can also help you get approved. When you put more money towards your car finance deal, you are reducing the amount you need to borrow from a lender. This helps to make your loan amount smaller and also reduce your monthly repayments. In some cases, it can also help reduce your interest rate offered too.
Make payments on time
One of the easiest ways to prove your credit worthiness and also raise your credit score is to make payments on time and in full. A good track record of meeting your current payments shows lenders that you are good with your money and can meet payment deadlines. It can take time to improve a bad credit score, but a better score can see easier acceptances, lower interest rates and more affordable finance deals.
Choose a specialist lender
It used to be a common myth that it’s impossible to get bad credit finance but now there are more lenders who specialise in helping people with no credit or a bad credit history. These lenders tend to focus more on affordability rather than your past history and as long as you cab prove you can afford to pay back your finance on time and in full, you could receive a full car finance approval with affordable monthly payments.
Consider hire purchase
The type of car finance agreement you choose can also affect your chances of approval. Agreements such as personal loans can be hard to obtain with low credit as they are usually reserved for those with better credit as they are provided by banks and building societies and are unsecured. Hire purchase on the other hand could be suited to people with low credit as it is a form of secured loan. This means the lender owns the car until all payments have been made and the term has ended, this means if you fail to repay the lender can use the car as collateral and take it off you.
Thank you for reading.
