Undoubtedly, obtaining a car finance deal despite a subprime credit report is possible, but it is not as easy as falling off a log. A poor credit rating is perceived as a high risk of default, and therefore, high interest rates are charged. Auto loans are available from direct lenders, and car finance deals, which include hire purchase and personal contract purchase, are available from car dealers.
Whether you apply for a car loan or a car finance deal, on no account would a lender be able to guarantee approval, as they will have to go through your credit score and income sources to decide whether or not to approve your application.
You should always try to research a lender before applying for a car loan. Each lender charges different interest rates, and that is because they all perceive the default risk differently. The higher the risk, the higher the interest rates will be. Bear in mind that lenders charge processing fees and associated charges that increase the cost of the debt.
Car loans and hire purchase, and personal contract purchase are different.
ØCar loans from lenders and hire purchase contracts from car dealers work the same way, requiring you to put down a deposit of at least 10% of the sticker price and getting ownership at the end of the final payment.
ØPersonal contract purchase, on the contrary, involves paying towards the depreciation of a car, giving you the option of taking it back at the end of the deal or purchasing it by making a balloon payment.
ØPersonal contract purchase is generally a suitable option for those who run a fleet of cars and want to update models after some time.
ØHire purchase could be more expensive than auto loans from direct lenders.
Is a no credit history equally risky as a bad credit score?
Many people are under the impression that they can qualify for a loan if they have no credit history at all. Lenders cannot say that you are a default borrower, but they do not have any grounds to say that you are a committed borrower either. Having no or a thin credit history will make it quite complicated for you to qualify for lower interest rates.
If you are looking to take out a car loan at lower interest rates, you should always build some credit rating. This improves your chances of qualifying for lower interest rates.
What if your credit history is too bad?
If your credit history is way abysmal, your chances of getting approved for a car finance deal are bleak. Whether you borrow money from a direct lender or a car finance deal from a car dealer, you will be required to put down a deposit of up to 10%. If your credit rating is not stellar, you will have to put down a larger deposit, up to 20% of the car’s value. Despite putting down a larger deposit, you will end up with a very high interest rate.
At the time of deciding whether or not to approbate your application, they will check your credit report. Hard inquiries will be made, and they will continue to show up on your credit file for the next two years. There are a few lenders who would claim to provide you with no credit check loans with guaranteed approval.
If you come across such loan deals, you should immediately understand that it is a red flag. No lender is authorised to sign off on without a credit check. Approval is made only after a perusal of your credit report and income sources. If lenders find that you will not be able to cut it, they will most likely turn you down.
Ways to get car finance with bad credit
There is no doubt that you can qualify for car finance deals despite bad credit, but it does not insinuate that you cannot be refused. A lender will take stock of your overall financial condition to determine whether or not your application should be signed off on. You should try to take the following steps to improve your chances of qualifying for car finance bad credit with guaranteed approval:
§Do up your credit score
It is vital to ameliorate your credit score. Try to make payments on time and pay down all your debts. At the time of taking out a car loan, your credit report must be free from outstanding debt. This will improve your chances of being qualified. Here is what you should do to increase your credit score:
üGet registered on the electoral roll.
üDo not change your address frequently.
üMake regular payments on time.
üKeep a credit utilisation ratio lower than 30%.
üUse Experian Boost to improve your credit score.
üCheck your credit report for errors. Get them fixed.
üKeep old accounts open to show increased credit length.
üConsider using a credit builder card.
While a debt-to-income ratio does not directly affect your credit score, you should try to keep it as low as possible to easily get approved for a car loan.
§Purchase a cheaper car
You should try to purchase a cheaper car if your credit history is not good. A poor credit rating will attract high interest rates. The overall cost of the car will be too high. Therefore, you should try to choose a cheaper car. If possible, consider buying a second-hand car. You should ensure that you do not end up paying more than your budget, and it includes interest payments as well.
§Pay more money upfront
Lenders find you a risky borrower when your credit history is not stellar. As a result, the risk is too high. You will certainly lose your car if you fail to meet your obligation, but a car is a depreciating asset, and lenders would never want to get into the hassle of taking it back. Therefore, they decide to charge high interest rates in order to mitigate their risks.
You can avoid it by putting down a higher down payment. Normally, you are to pay down up to 10% of your car’s value, but if you try to make it at least 30 to 40%, your chances of being approved are quite high.
§Arrange a guarantor
You should try to arrange a guarantor with a good credit rating. The guarantor is one who agrees to pay off the debt when you fail to discharge your obligation. A guarantor could be your family member or a friend. Bear in mind that if you fail to repay your debt, it will affect the guarantor’s credit score too. It will also ruin your relationship with your guarantor as well. Involving a guarantor will reduce the risk for the lender, and hence, there is a possibility of getting approval for a car finance deal.
The final word
You can get a car finance deal despite a bad credit rating, but you will have to arrange a larger deposit. The minimum size of the down payment should be 20%. You should arrange a guarantor whose credit history is stellar and try to purchase a cheaper car.
It is still recommended that you ameliorate your credit rating. This will help you qualify for lower interest rates.
