It’s a common misconception that having bad credit means that you can’t be accepted for any sort of loan or finance. However, this isn’t strictly true anymore. As the UK finance industry has progressed over the years, there are now many different options for people with bad credit to get car finance or other types of credit. If you’ve been refused car finance in the past, you’ll know how disheartening it can be and you may also think if you have been declined by one, you’ve been declined by all finance companies. No car finance company can guarantee car finance, but many lenders are choosing to look at current affordability rather than your financial history, which opens more doors for people with bad credit to get car finance.
What is bad credit?
Your credit score is a reflection of your credit history, which can be displayed on your credit file. Your credit file is basically a financial CV, which you can view online for free and it also helps lenders determine whether you are a responsible lender. Your credit file shows information such as credit accounts in your name, your repayment history, current and previous addresses and any financial connections, all of which are used to calculate your credit score. You may find yourself with bad credit and not be sure why or where you’ve went wrong over the years. A bad credit score can be due to a number of things but the main reason being missed or late payments, being declared bankrupt, having a County Court Judgement (CCJ), entering into an Individual Voluntary Agreement (IVA) and having no previous credit history. Many people believe if they have no credit history, then they automatically have good credit however in some cases this is not correct. Lenders don’t have any evidence that you are trusted to pay back any money owed, which may result in a low credit score.
Check your credit score
As mentioned, you can check your score for free online using a reputable credit reference agency such as Credit Karma or Equifax. You should get into a good habit of checking your credit score or file each month or before applying for any sort of finance or loan. When you check your credit file, you should make sure all your information is accurate and up to date and look out for any fraudulent activity. You can also see if you are linked to any financial partners who you may have taken out credit with in the past. If you no longer have an agreement with a financial partner but it still shows on your credit file, its best to disassociate yourself as a low credit score on their behalf could be dragging yours down too.
Increase your credit score
Before you apply for bad credit car finance, there are a number of easy ways you can increase your credit score to put you in the best possible position! Improving your credit score can take time and effort but if it increases your chances of being approved for finance, it’s definitely worth it!
- Register on the electoral roll. This is one of the easiest ways to increase your credit score! Even if you’re not bothered about voting in the UK, it’s a good idea to register on the electoral roll. Potential lenders can use the electoral roll to verify that you are who you say you are and your address history.
- Don’t miss or make late repayments. This one can be difficult if you have high levels of debt or have had trouble in the past making repayments. However, even just a few months of making repayments on time and in full can indicate to lenders that you can be trusted to pay back any loan or credit borrowed.
- Keep credit card balance low. Your credit utilisation ratio does count towards how your credit score is calculated. Lenders will look at the amount of available credit you currently have and keeping your credit utilisation low can show lenders that you can control your credit. It is recommended that you keep your credit utilisation under 30%.
Types of car finance
In the UK, there are typically 3 different types of car finance that are the most popular from company use as 2ndchanceauto.com. A personal loan, Personal Contract Purchase (PCP) agreement and Hire Purchase (HP) agreement all have the same underlying principle, where you borrow a certain amount of money for a car and then pay it back in instalments to an agreed term. Each agreement has a few different factors such as the options at the end of your agreement and ownership of the car.
Personal Loan
A personal loan lets you spread the cost of owning a car into affordable monthly payments and can usually be offered by banks, building societies and finance lenders. Because a personal loan can be used to buy pretty much anything, you are able to buy the car with your loan and become the automatic owner of the car. This suits many people who want the flexibility to own the car and sell it when they want. You can take out a personal loan over 1 to 7 years and pay back the amount required in monthly payments to your chosen term length.
Personal Contract Hire (PCP)
A PCP deal is one of the most popular in the UK. You take out finance on your desired car and pay it back over an agreed term, normally between 2- 4 years in monthly instalments. You do not own the car from the start, but you can still use the car as normal. At the end of your PCP agreement you tend to have 3 options. You can give the car back, pay the resale value and keep the car or use the resale value towards buying a new car.
Hire Purchase (HP)
This is one of the simplest car finance deals. Within a Hire Purchase agreement, you usually out down a 10% deposit, however there are no deposit car finance options available too! You then make fixed monthly payments to your agreed term length. Once you have made the final payment, the ownership of the vehicle is then transferred directly to yourself.
Soft search vs hard search
When you apply for any sort of finance, loan or credit, lenders will run a search on your credit file. A hard search is when a lender takes a full look at your credit report and leaves a mark on your credit file to say that they have looked. This means other potential lenders can see when you have applied for credit. Making multiple applications for car finance in a short space of time can harm your credit score and it indicates to lenders that you are desperate for credit. A soft search, however, does not harm your credit score. It enables lenders to see some information about your such as credit score and name, address etc but it will not give them access to your full credit report. A soft search is only visible to you, but you should check whether a search from prospecting lenders is a hard or soft search.
Increase your deposit
Not everyone has a hefty savings account and are able to put down a large deposit for car finance. However, increasing your deposit could help you chances of being approved. It also helps you as the bigger the deposit you out down, the less money you are borrowing so the smaller the monthly repayments. Putting a bigger deposit down can give your potential lender more confidence that you can be trusted to make your repayments on time and in full.