Car Finance with Bad Credit: How to Get Approved

If you have bad credit, the thought of getting car finance can be daunting. You might feel like you've already been rejected before you've even started. But don't worry - getting car finance with bad credit is not impossible. In fact, there are several steps you can take to increase your chances of getting approved. In this article, we'll guide you through everything you need to know about car finance with bad credit, including how to get approved, what to expect from lenders, and how to improve your credit score.

What is Bad Credit?

First things first, let's define bad credit. Bad credit is a term that lenders use to describe a poor credit score. Your credit score is a number that represents your creditworthiness, based on your credit history. A bad credit score indicates a higher risk of defaulting on credit repayments, which makes lenders less likely to approve finance applications. In other words, lenders see you as a higher-risk borrower, which can make getting approved for car finance a challenge.

Why is Bad Credit a Problem for Car Finance?

When it comes to getting car finance, your credit score is one of the most important factors that lenders take into account. Car finance companies use credit scores as a way of assessing risk, and if your credit score is bad, it can be a red flag for lenders. This is because people with bad credit scores are considered to be higher-risk borrowers, as they are more likely to default on their payments.

As a result, if you have bad credit, lenders may charge you higher interest rates or require a larger deposit to offset the risk. This is because they want to make sure that they are protected in case you can't make your repayments. It's important to note that this is not personal - it's just the way that lenders operate.

The good news is that having bad credit doesn't mean that you won't be able to get car finance. There are still options available to you, and by taking steps to improve your credit score, you can increase your chances of getting approved for car finance at a better rate.

How to Get Car Finance with Bad Credit

Despite the challenges, it is still possible to get car finance with bad credit. Here are some steps you can take to improve your chances of approval.

Check Your Credit Score  

One of the first steps to obtaining car finance with bad credit is to check your credit score before you apply. This will give you a clear idea of where you stand and whether there are any areas that need improvement. By doing so, you'll be able to take action to address any issues, and ultimately increase your chances of being approved for car finance.

Luckily, checking your credit score is a relatively straightforward process, and can be done for free using online services such as Experian, Equifax, or TransUnion. These services provide a detailed report of your credit history, including any outstanding debts, late payments, or other negative marks that may be impacting your credit score.

Once you have this information, you can take steps to address any areas that need improvement. For example, if you have outstanding debts, you could focus on paying these off to reduce your overall level of indebtedness. Or if you have a history of late payments, you could set up automatic reminders to ensure that you don't miss any future payments.

By taking action to improve your credit score before you apply for car finance, you'll be able to demonstrate to lenders that you are taking your financial responsibilities seriously. This can go a long way towards increasing your chances of being approved for car finance and may also help you to secure more favourable interest rates and repayment terms.

Consider a Guarantor Loan

If you have bad credit and are struggling to obtain car finance, a guarantor loan could be a viable option. This type of finance involves having someone else guarantee the loan repayments on your behalf, reducing the risk for the lender and increasing your chances of being approved for finance.

The way it works is that a guarantor – typically a family member or friend – agrees to take on the responsibility of making the loan repayments if you are unable to do so. This provides added security for the lender, as they have someone else to turn to if you default on your payments. In some cases, the guarantor may need to provide security in the form of a property or other asset.

One of the advantages of a guarantor loan is that it can be a good option for those with bad credit, who may otherwise struggle to obtain car finance on their own. By having a guarantor in place, lenders are more likely to approve your application, as they have added security in the form of the guarantor.

However, it's important to note that there are some potential downsides to guarantor loans. Firstly, finding a guarantor can be challenging, as not everyone is willing or able to take on this type of responsibility. Secondly, if you default on your loan repayments, this can have a negative impact on your guarantor's credit score, which could damage your relationship with them.

Ultimately, a guarantor loan can be a good option for those with bad credit who are struggling to obtain car finance. However, it's important to carefully consider the potential risks and downsides and to ensure that you have a trusted and reliable guarantor in place before applying.

Saving for a Larger Deposit

One of the best ways to increase your chances of securing car finance with bad credit is to save for a larger deposit. Lenders typically assess the level of risk involved in lending to you based on your credit score, income, and overall financial situation. If you have a poor credit score, you may be considered a higher-risk borrower, and lenders may require a larger deposit to offset this risk. By providing a larger deposit, you can show the lender that you are committed to making the repayments and are less likely to default on your loan.

For instance, if you want to purchase a car worth £10,000 and the lender requires a 10% deposit, you would need to save £1,000. However, if you can afford to save a 20% deposit, you would need to save £2,000, which can make a significant difference in your chances of securing car finance.

To save for a larger deposit, you may need to take a disciplined approach to your finances. One strategy is to set up a dedicated savings account and regularly deposit a portion of your income into it. You could also consider selling any unwanted items or taking on additional work to boost your income and save more money. You could even consider selling your car to help speed up the process. 

Shop Around for the Best Deal

When it comes to securing car finance with bad credit, it's essential to shop around and compare deals from different lenders. Don't just apply for car finance with the first lender you come across. By shopping around, you can find a lender who is more likely to approve your application, and at a better rate.

Each lender will have different criteria when assessing car finance applications. By researching different lenders and comparing their rates, you can increase your chances of finding the best deal for your individual circumstances. This can include lower interest rates, more flexible repayment terms, and lower deposit requirements. A great starting point for car finance is Motorlend. 

What to Expect During the Application Process

Once you've decided on a car finance option, the next step is to apply for a loan. During the application process, you can expect the following steps:

1.     Credit Check: The lender will perform a credit check to assess your creditworthiness. This includes checking your credit score and credit history. Your credit score is a crucial factor in determining whether you'll be approved for the loan and what interest rate you'll be offered.

2.     Proof of Income: You'll need to provide proof of income, such as pay stubs or bank statements, to show that you can afford the car loan. The lender will use this information to determine the loan amount you're eligible for and to calculate your monthly payments.

3.     Down Payment: In some cases, you may be required to make a down payment on the car loan. A down payment can help reduce the amount you need to borrow and can show the lender that you're invested in the purchase.

It's important to note that the application process can vary depending on the lender and the car finance option you choose. Some lenders may require additional documentation, such as proof of residency or a valid driver's license. It's essential to carefully review the application requirements and provide all the necessary information to avoid delays or denials.

Once you've submitted your application, the lender will review your information and make a decision. If you're approved for the loan, you'll receive the terms and conditions of the loan, including the interest rate, monthly payments, and repayment terms. Review these terms carefully to ensure that they're affordable and meet your financial needs.

Improving Your Credit Score

Improving your credit score can take time, but it's worth the effort if you want to get better rates on car finance. Here are some steps you can take to improve your credit score:

1.     Pay Your Bills on Time: Late payments can have a big impact on your credit score, so it's important to pay your bills on time. Set up reminders or automatic payments to make sure you don't miss any payments.

2.     Reduce Your Debt: Having a lot of debt can make it harder to get approved for car finance. Try to pay down your debts and reduce your credit card balances. This can help to improve your credit utilization ratio, which is an important factor that lenders consider when assessing your creditworthiness.

3.     Check Your Credit Report: Checking your credit report is essential, as errors and mistakes can negatively impact your credit score. You can check your credit report for free using online services like Experian, Equifax, or TransUnion. Dispute any errors or mistakes to get them removed from your credit report.

4.     Use Credit Responsibly: Using credit responsibly can help to improve your credit score. Make sure you make payments on time and avoid maxing out your credit cards. Don't open too many credit accounts at once, as this can negatively impact your credit score.

Everyone's credit situation is unique.

Final Thoughts 

If you have bad credit, getting approved for car finance can feel like an uphill battle. However, it's important to remember that it's not impossible to get car finance with bad credit. By following the steps outlined in this article, you can increase your chances of getting approved for car finance, even if you have a poor credit score.

The first step is to check your credit score. This will give you an idea of where you stand and whether you need to take steps to improve your score. You can check your credit score for free using online services like Experian, Equifax, or TransUnion.

If your credit score is low, a guarantor loan may be a good option. A guarantor loan is a type of car finance where someone else agrees to guarantee the loan repayments if you can't make them. This reduces the risk for the lender, making it more likely that you'll be approved for finance.

Another way to improve your chances of getting approved for car finance is to save for a larger deposit. Lenders may require a larger deposit to offset the risk of lending to someone with bad credit. Saving up for a larger deposit can improve your chances of getting approved for car finance and can help to lower your monthly repayments.

It's also important to shop around for the best deal. Don't just apply for car finance with the first lender you come across. Compare deals from different lenders to find the best rates and terms. By doing your research, you can increase your chances of getting approved for car finance at a better rate.

Finally, if you're struggling to get approved for car finance with bad credit, seek professional help. Credit counselling agencies can help you to improve your credit score and find ways to manage your debt. They can also provide advice on how to approach lenders and negotiate better terms.