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Getting car finance is likely to be easier if you have a favourable credit score – but having a bad credit rating isn’t the end of the world. Find out what you need to do to apply for car finance if you have bad credit.
Published: 5 May 2023
If you have a poor credit score, it can affect your ability to be approved for a car finance agreement, but you may still have options. Here we look at how it all works, what it might cost you and how you can improve your credit score.
Every time you apply for any type of credit, whether it’s for a car finance agreement or a credit card, the potential lender will check your credit score. This is a record of all your applications for credit, credit agreements and payments you’ve made. It also lists any missed or late payments.
A high credit score is a sign that you’ve borrowed responsibly in the past and paid back the money you’ve owed on time. If you have a good credit score, you’re more likely to be approved for finance and at a favourable rate.
If you have bad credit, for whatever reason, a lender may charge you more for a loan or finance deal or may decide not to lend to you at all.
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The companies that collect and store data about your payments, how much you owe, when you apply for credit and when you miss payments are called credit reference agencies. Three main credit reference agencies that operate in the UK are Equifax, Experian and TransUnion.
These agencies use the data that they gather to give you a credit score. Each one collects and calculates credit scores slightly differently, but you’ll usually be shown if yours is ‘poor’, ‘fair’, ‘good’ or ‘excellent’. It’s free for an individual to check this information about themselves at any time. Most credit reference agencies also have premium services that you can pay for if you want a more detailed report on your financial information.
The credit agencies securely hold data about your financial history and they use this to create a credit score for you. While each agency will have its own scoring system, your credit score can vary depending on which one you choose. However, your credit score is likely to be similar across the agencies.
Buying a car with a finance deal is a popular way of getting a new vehicle. If you are going down this route, any potential finance provider will look at your credit score.
If you have a very poor credit score, the lender may decide not to give you a finance deal. This is because it may see you as too big of a risk to lend to because you might not repay what you owe on time, or at all. However, even if you have a poor credit score, a car finance provider may agree to lend to you but then charge you a higher interest rate.
You can usually find out how likely you are to be accepted for a car finance deal, and at what interest rate, if you use an eligibility checker. These are online tools that are free, don’t leave a mark on your credit score and can help give you an idea of your chances before you make an official application for finance.
An eligibility checker can also provide you with information on the different types of products open to you too. For example, PCP requires a higher credit score than HP due to the particular conditions of this kind of finance agreement.
The main difference between PCP and HP is what happens at the end of your agreement. With HP, you become the legal owner of the car because you will have paid off its full value. There is no limit on the mileage or fees if you damage the car. With PCP, you are only paying off a portion of the car’s value over the lifespan of the finance agreement. This means that you will need to pay a final lump sum, known as a balloon payment, if you want to keep the car. You will also be subject to fees, like an option to purchase fee or any excess damage to the car beyond agreed normal wear and tear. There will also be an agreed mileage limit, which you will be informed about before you enter into the finance agreement.
When you are buying a car and require financing, you can choose from three options:
With HP car finance you usually pay a non-refundable deposit at the start of the contract and then payments throughout. It’s important to understand, however, that this deposit is part payment on the overall cost of the finance agreement. At the end of an HP contract, you own the car outright.
With PCP car finance you pay a non-refundable deposit – once again, this is taken as a part payment on the overall cost of the finance agreement – at the start of the contract. You then make monthly payments over the course of the agreement, but in order to keep the car at the end of the contract you’ll need to pay a final lump sum. This is also known as a balloon payment. Alternatively, you can give the car back to the finance provider or buy a new car with a new contract by part-exchanging it.
Rather than signing an HP or PCP agreement to buy your car, another option is to apply for a personal loan from a bank or other financial institution. You can then use the money to buy the car, making monthly repayments plus interest to the provider of the loan. With this method, you’ll be the owner of your car from the outset.
One solution to getting car finance if you have a bad credit score or don’t have a strong credit history (for example, if you’ve never had credit before), is to use a guarantor. A guarantor is usually someone that you know well, like a family member or friend, who co-signs the credit agreement. They become jointly liable to pay any finance instalments if you’re unable to for any reason. Some car finance and personal loan providers may allow a guarantor to co-sign a credit agreement.
Getting a guarantor on board isn’t a decision to make lightly, however. Interest rates tend to be higher than if you had a regular personal loan, while any missed repayments not only affect your credit score, but will also appear on your guarantor’s credit report. Finally, there is also an emotional factor involved. Conversations about the finance repayments can put a strain on a relationship.
The amount of interest you pay for your finance agreement will depend on the type of car you’re buying, how long your contract is, the size of your deposit and your credit score.
Before you sign a car finance agreement, you’ll be told exactly how much it will cost. This includes the deposit you need to pay at the start, monthly repayments and any final payment if needed. You should also be given information about interest and any extra fees and when they might be applied.
There are lots of car finance providers and it may be possible to get a deal even if you have bad credit and no guarantor.
However, if you do have a poor credit score the offer you’re likely to receive may come with a higher interest rate and it could be costlier over the length of the contract.
If possible, it may be better to wait until your credit score has improved or until you can save more money for a larger deposit.
The good news is there are lots of things you can do to boost your credit score. The bad news is there’s no quick fix and it won’t change overnight – or even in the next few weeks or months. However, there are things you can do to start raising your credit score, including the following:
It’s free to join the electoral register – do so via the Gov.uk website. If the potential lender is able to quickly confirm your current address it can instantly help improve your credit score.
Always pay back anything you owe on time. The best way to do this is to set up a direct debit payment so payments leave your bank account automatically on the same day each month.
You’ll have a higher credit score if you’re not using all the credit available to you.
If there’s an error on your credit report, such as a wrong address, this can hurt your score. It pays to be vigilant.
When you apply for car finance something called a hard credit search takes place, which shows up on your credit score and can be seen by other lenders. You should be careful about making several applications in a short space of time. This can have a negative effect because lenders might think you're short of money and are unable to manage your finances adequately.
However, you can use an eligibility checker before you apply for finance. This conducts a soft search, which doesn’t show up on your credit score. It will give you an idea of how likely you are to be accepted without leaving a mark for lenders to see. You just need to enter a few details (name and address, etc) and you should receive an idea of your eligibility within seconds.
Each credit reference agency has its own method for calculating credit scores and there’s no set number for being accepted for credit.
If you are currently bankrupt it’s very difficult to get accepted for car finance. Once you have been discharged from bankruptcy (usually this is after 12 months), providers will be much more likely to consider you, although you may end up with a more limited choice and a higher interest rate. Bankruptcy usually remains on your credit report for up to six years.
It’s possible to get car finance if you have a county court judgement (CCJ) registered against you but lenders may be less willing to approve your application because they will see you as a high risk, and you may pay a higher interest rate. A CCJ stays on your credit report for six years, even if you’ve paid it off during this time.
If you’ve defaulted on a loan in the past this will be marked on your credit score and, if it happened within the past six years, it will affect your ability to get car finance. You may still be approved but the interest rate you pay could be higher than that of someone with a better credit score.
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