It’s common for lenders to carry out a credit check on anyone who applies for a car loan. This is usually a ‘soft search’ initially. Credit checks can lead to those with poor credit scores shying away from applying due to the fear of rejection. However, you’ll be surprised how easy it is to successfully obtain a loan by making a few minimal changes.
In this short guide, we’ll explain everything you need to know when applying for a car loan with poor credit. In addition, we’ll cover how to get the best deal by ensuring your credit score is up to scratch.
What is a car loan?
Finding the right car within your price range can be a challenge. But, with a car loan, you can spread the payments out over a course of several months or years. This is a great way of significantly increasing the options available to you.
Two popular forms of car loan are a personal loan and Hire Purchase (HP). A personal loan will see someone borrow money from a lender, bank or building society. This allows them to have instant ownership of a car. In contrast, HP will have the individual pay an initial deposit (not always required) with fixed monthly payments for the next three to five years. They effectively hire the vehicle over the period, with the option to purchase at the end.
At the end of the term, they will be offered three choices; to either return the car to the supplier, keep it, or trade it in for a replacement. However, you must be careful not to miss the repayments before the end of the term. In these cases, the finance company may decide to repossess the vehicle to settle the debt.
How can you improve your credit score?
A lender will perform a credit check to ensure that the person applying can afford the monthly payments. People who obtain an excellent credit score will have demonstrated a firm grasp of their finances. In theory, this makes for a reliable choice for lenders.
Those described as having a ‘thin’ credit history will have a history of missing payments. Alternatively, there may be little concrete evidence of financial security, such as never owning a credit card or bank account. A higher credit score will open more doors. This could include a much more comprehensive range of car loan options. These are often accompanied by much more favourable interest rates.
Here are some simple but effective ways of raising your credit score.
1. Identify the problems in your credit report
Before you apply for a car loan, it will be wise to get a free copy of your credit report. This will give you an idea of any pitfalls that may scupper your loan request. There may be some glaring mistakes you are making in the way you handle your money, damaging the profile. It is also worth ensuring it is up to date and doesn’t contain any errors or inaccuracies which could unfairly affect your score.
2. Apply for a credit card and use it sensibly
Credit cards have a strange reputation of being a poor way to save money. But the truth is that as long as you’re making repayments on time, they will put you in good stead to improve your credit score. Proof that you can budget and regularly meet repayment deadlines will help you secure a more competitive car loan deal.
3. Stay away from bad credit
If you’ve ever been financially linked with someone you know has bad credit, such as a joint account or shared mortgage, it may lower your credit score. If this is the case, it will be a good idea to issue a notice of disassociation. This informs lenders that you are no longer financially linked and should be judged on your own merit.
4. Settle any loans
Now is the time to settle those loans and reduce your debt as much as possible. This is easier said than done, but to get behind the wheel of the car you desire you may need to work at it.
What are my other options for obtaining a loan?
Start by crunching the numbers on a car loan calculator. You may consider making slight changes to the car loan variables to see how it can help. No matter how low your credit score, some changes can ultimately work in your favour to help you get a car with poor credit history.
1. Pay a larger deposit
Simply put, a larger up-front deposit will mean your monthly payments will be reduced. This in turn minimises the risk for the lender in ensuring they are met. It can be frustrating as you’ll be forking out a potentially huge chunk of money. That said, it is often a sure-fire way to improve your chance of getting the deal.
2. Pay a higher interest rate
Someone with a low credit score will often need to accept a higher interest rate than the advertised representative rate. Again, it may seem frustrating on the face of it. However, don’t despair as it tends to mean only a slightly higher monthly payment.
3. Choose a lower annual mileage limit
Opting for a lower annual mileage limit can result in much lower costs month to month. This is because the car will be worth much more to the dealer at the end of the loan. This is usually related to fewer miles on the clock and less wear and tear.
However, you will want to keep the figure realistic. Going over your allowance will end up costing you dearly. You will find that there are harsh penalties that charge you for every extra mile taken.
4. Choose a used car
Opting for a loan on a used car will ultimately see you borrowing less money from a provider. This improves the possibility of obtaining a loan, even with a poor credit score. There is much less risk for the dealer as the car will already have depreciated in value. However, this doesn’t deflect from the fact that used cars are mostly reliable and of good quality.
If you worry about being able to afford to buy a car, this may be the best and most sensible option.
Need help getting a car loan with a poor credit score?
Take the headache out of getting a car loan with a straightforward and simple chat with our friendly specialists. Find out more about how we can find the right deal for you no matter how your credit score may look.
You’re not in this on your own, and we’ll support you every step on the way to get you on the road with the car of your dreams. Give us a call on 01246 458 810 or email firstname.lastname@example.org to find out more
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