Why do lenders do a credit check?
Lenders do credit checks to understand your financial behaviour and assess your history of handling your finances. They will be assessing your ‘creditworthiness’, or your suitability to receive financial credit. This is often based on how reliable you have been at paying back money in the past.
Lenders have an obligation to lend money responsibly. It can be frustrating knowing that your finances and credit profile will be scrutinized but this ensures that you are not lent more money than you can afford (called ‘affordability’), and that the finance product you are sold is suitable for your circumstances.
Whilst there are some payday lenders who will offer finance without a credit check, you will be charged enormous rates of interest to accommodate the increased risk of lending. This can be unaffordable for larger loans, such as buying a car.
By having a credit check done, this ensures you are offered the correct rate of interest for your circumstances, rather than over-paying.
Soft search versus hard search
When shopping around for car finance, customers can be concerned about damaging their credit profile through multiple hard searches.
To avoid this happening, and to make it easier for you to shop around, when you first apply for car finance with My Car Credit, we only do a soft search credit check. This allows us to do preliminary background checks to establish your eligibility for car finance.
The important thing about soft search is that it doesn’t show on your credit file. This means that they don’t impact on your credit score, and they don’t affect your future chance of securing credit. You can have as many soft searches as you like, and only you can see them on your report.
A hard search happens when you have confirmed that you are eligible for car finance, and are happy to proceed with your application.
A hard credit check will show on your credit file. It is worth bearing in mind that too many hard credit checks over a short period of time can affect your future ability to secure finance. This is because they tell lenders that you have applied for credit, and therefore may be a higher risk.
The great thing about using soft search first is that you can establish your eligibility for car finance before you move ahead with a full search. When you then go on to secure car finance, so long as you keep up your repayments, you may actually improve your credit rating. You can even repair your credit file if it is damaged!
What’s involved in a credit check?
When you apply for credit or a loan, the lender will perform a credit check (sometimes called a credit search) so that they can look at the financial information held on your credit report.
Your credit report will show information such as:
- Your name and date of birth.
- Your current and previous addresses.
- Whether you are on the electoral register.
- Your credit accounts, including bank and credit card accounts, outstanding loan agreements or utility company debts. Late or default payments will show, and stay on your credit report for at least six years.
- Financial associations. These are people you are financially linked with through joint credit.
- Public record information. This covers
- County Court Judgments (CCJs), bankruptcies and individual voluntary arrangements (IVAs). These stay on your report for at least six years.
- Banks and building societies. Only your overdraft is shown, not your balances or savings.
- Any convictions of fraud, or if someone has stolen your identity and committed fraud.
Details such as salary, religion, or criminal convictions (other than fraud) are not included.
How can I check my credit profile?
You may want to check your credit profile before you start applying for car finance. Checking your credit profile doesn’t leave a mark on your file and it can help you understand what lenders will see.
It is also a great opportunity to improve your credit score by ensuring that all information held on you is correct and up-to-date. For example, ensuring that out-of-date financial associations don’t have a negative impact on your credit file.
Your credit score is an indication of the health of your credit file, and is usually scored out of 1000. The higher the score, the better your credit profile.
There are three main credit reference agencies in the UK – Equifax, Experian, and Transunion (formally Call Credit). They hold financial information on you, and are governed by the Information Commissioner’s Office or ICO.
Websites like Credit Angel allow you to access your credit report for free for the first 30 days (there is a fee of £19.99 after this, and you can cancel at any time).
What are my options if my credit score is poor?
My Car Credit has over 30 lenders on its panel and so the chances of getting you an acceptance are increased (although cannot be guaranteed!).
We have lenders that specialise in car loans for customers with damaged or poor credit. You will usually have to pay a higher interest rate, as you represent an increased risk for the lender. You can pay off your loan faster if you wish, and this can help to repair your credit file.
It can also help if you put down as large a deposit as you can afford, and keep the repayment term shorter. However, it’s important not to overstretch yourself on your monthly payments.
There is also the option of a Guarantor Loan. This is a loan where a third party that you trust (usually a family member or close friend) guarantees to make the repayments on a car loan if you fail to. You do remain responsible for the finance agreement.
Please be aware that if you fail to make the repayments, your guarantor will become liable. If your guarantor fails to make the payments, you could both be issued with CCJs, which would affect both your abilities to obtain credit in the future.
Whilst Guarantor Loans are a great way for someone with impaired credit to get car finance, they should not be taken lightly as they come with great responsibility. You can read more about Guarantor Loans here.
So, hopefully, we’ve shown you that credit checks are nothing to be worried about. It is more than possible to check your eligibility for car finance before you have a hard credit check, and credit checks ensure that lenders lend you the right amount, at the right interest rate for your circumstances. We hope this helps you feel more confident about applying for car finance to buy that car of your dreams!