Many people are under the misconception that you can’t get approved for car finance if you have a bad credit score. It can be harder to obtain finance and you may receive a higher interest rate than those with better credit. But not all hope is lost, and you could still get car finance with affordable monthly repayments, even if you have a poor credit score. There are a number of car finance agreements that can suit people who are looking for car finance for bad credit. But first, let’s take a look at how you end up with a poor credit score and how can you avoid it?
Why do you get a bad credit score?
Your credit score is based on the information listed on your credit file and can be affected by a number of factors. One of the most important aspects of you credit score is how you handle your credit agreements. Failing to meet repayments in full or making late repayments can seriously impact your credit score and your ability to get finance in the future. This is because you are seen as more of a risk to future lenders. People with good credit score usually have a solid history of taking out credit and paying it back on time and in full. Missed or late repayments can then lead to more serious financial implications such as defaults, CCJ’s, IVAs and declaring bankruptcy. Having high levels of debt can also negatively impact your credit score as it can indicate to lenders that you are struggling to keep up with your current commitments. Its best to have your finances in order first before applying for any more credit. Many people also assume that not having any credit is a good thing. However, with no financial history, lenders can’t predict what type of borrower you will be and may result in higher rates offered.
Let’s take a look at the car finance agreements which can be more suited to people with low credit scores.
Hire purchase car finance
Hire purchase car finance is a popular type of secured loan. A secured loan means the value of the loan is against an asset such as a vehicle. You spread the cost of your chosen vehicle into affordable monthly payments with interest. Car finance lenders can offer people with bad credit a hire purchase agreement because they can use the car as collateral. If you have failed to meet repayments in the past, lenders may be wary that you won’t pay your loan back. However, the loan is secured against the car which means the lender has the right to take the vehicle away from you if you fail to repay. At the end of the agreement, you make the final payment and ownership is transferred over to you. You can then keep or sell the car as you wish with no more payments to be made.
Guarantor car finance
Guarantor car finance deals can be one of the most accessible ways to get finance. Guarantor car loans provide the finance lender with more security that your loan will be paid back. This is because your guarantor agrees to pay the finance if you fail to do so. A guarantor can be a friend or family member who will meet your monthly finance payment if you don’t. Usually, your guarantor has to be someone who has good credit, is over 21 years old and who you have mutual trust with. Ideally, you will be responsible and meet all repayments and the guarantor just acts as a safety net for the lender.
Black box car finance
You may be more familiar with black box car insurance but black box car finance can be beneficial to those with a low credit score. A black box for car finance is fitted in a similar way but is used for a different purpose. Black box for insurance can track your driving style or habits but for car finance purposes it does not need to. Black box car finance is used to send the driver a payment reminder when their car finance payment is due. This can be helpful to people who have had trouble in the past meeting their repayments. Some black box agreements also have the ability to disable the car if payment is not made.
PCP car finance deals
Personal Contract Purchase (PCP) is a form of hire purchase but instead you don’t pay the cost of the full car. The payments instead cover the amount the car is expected to lose during the agreement, so they tend to have lower monthly payments. Like hire purchase, the loan is secured against the car so you could lose the vehicle if you don’t meet your repayments. PCP gives you more flexibility at the end of your agreement too, you can either pay the lump sum and keep the car, hand the car back to the dealer or use the value toward another car on a new PCP deal.