When you have a low credit score, you may be worried about your chances of getting approved for any sort of finance or credit. It’s long been a car finance myth that you can’t get accepted if you have bad credit. However, nowadays there are many options for people with a low credit score to get a car on finance. By selecting the right lender or opting for a bad credit friendly finance agreement, you could be driving your new car in no time. The guide below has been designed to look at how credit score affects different stages of the car finance process and what you can do to help improve your credit score in the run up to an application.
Why is credit important for car finance?
If you’re looking for car finance with no credit check, you may be out of luck. Most lenders now require you to undergo a credit check before they determine if you’re eligible for car finance or not. However, a credit check no longer has to have a negative impact as more lenders than ever are choosing to use a soft search credit check instead. This is not recorded on your credit file and won’t impact your current credit score either. Lenders use a credit check to determine the level of risk. If you’ve missed payments in the past or have high levels of debt or credit usage, lenders may be worried that you can’t afford to pay back your loan on time or based on your past behaviour, aren’t likely to meet deadlines.
How can credit score affect car finance?
There are a number of ways that a bad credit score can affect the car finance process. However, it doesn’t have to be a roadblock to getting a car on finance.
Applying for car finance
When you apply for car finance, lenders will require you to undergo a credit check. Usually once you hit submit on an online application, a credit check will automatically be carried out on your credit report. Where possible, you should only apply with bad credit specialists who are designed to help get you approved. Applying with mainstream or prime lenders can be pointless are they aren’t likely to offer you an approval and slows down the car finance process.
Getting an approval
Once you’ve applied for car finance, it’s up to the lender to decide whether or not you are eligible for car finance. If you’ve been declined car finance, it may not even be down to your credit history. Each individual lender has their own criteria that needs to be met before they can offer you an approval. For example, usually you will need to be 18+ years old and under 70 years old, have an income of a certain amount or have a full UK licence. It’s worth checking a lenders criterion first to maximise the chances of getting a car loan.
Your car finance deal offered
If you’ve applied for car finance and received a full approval, well done! Your credit score not only affects your chances of approval but can also determine the APR you are offered. The APR reflects the cost of borrowing plus any additional fees. Lenders can sometimes use higher interest rates for people with bad credit to help secure the deal. A higher interest rate means you are paying more than you need to. It can be hard to have multiple finance offers when you have bad credit but it’s worth searching round for the lowest APR offered to help make your deal more affordable.
Refinancing your car loan
Whether you’re looking to refinance your car loan or spread the cost of your PCP balloon payment, your credit score will play a part. Refinancing is when you replace your current loan with a new loan, usually with better terms or a longer-term period. Refinancing can help to make your payments more affordable and hopefully get better terms if your credit score is good. You may struggle to refinance a balloon payment with bad credit but there are specialist lenders who can help keep you driving the car that you love!
How to increase your credit score for better car finance approvals:
It can be possible to get car finance with a low credit score. However, having a better credit score can make your life easier! There are a number of ways in which you can start to increase your credit score before you apply for car finance.
- Make any payments on time and in full
- Reduce the amount of debt you have to make a car finance deal more affordable.
- Remove any financial links on your credit file from people who have a bad credit score as it can negatively impact yours too.
- Keep your current credit usage as low as 30% of your credit limit.
- Avoid taking on any more new credit or opening accounts in the run up to your application.