Bad credit and car finance

A bad credit score can make it harder for you to get car finance, but it doesn’t prevent you entirely.
We’ll look at your car finance and leasing options if you have a bad credit rating. There is work you can do to improve your credit score over time, and access better finance plans as a result. Let’s go through them together.

You’ll hear the words credit score, credit report and credit history used a lot. Here’s what they all mean:
• Your credit score is a three-digit number that represents your borrowing history. The higher the score, the more likely you are to be classed as “credit worthy” and approved for finance. • Credit score and credit rating are sometimes used interchangeably, but they are slightly different. A credit rating refers to the different systems and scores used to assess your creditworthiness. • Your credit history is a record of your personal information (for example, your name, date of birth and address) and any electoral roll data, plus relevant information like your credit searches, repayments you’ve made – including missed or late payments, any defaults you may have had on payments, and information from public registers like the County Court Judgement (CCJ) Register or the Insolvency Register, if that applies to you. • Finally, your credit report is the document your credit history is covered on. Lenders will use it, alongside your application form, to see if you meet their criteria for lending. Improving your credit history over time can improve your credit score, so that’s what you need to focus on.

Your credit score is used by lenders – including car finance providers – to gauge how likely it is you’ll be able to make any repayments you owe.
People with a higher credit score are often more likely to be accepted for finance applications. Those with high credit scores can sometimes access better deals with lower interest rates, or even 0% car finance deals.

You can get a copy of your statutory credit report and credit score from any of the three main credit references agencies: Experian, Equifax or TransUnion. Just note some of these sites offer free trials that you’ll have to cancel if you don’t wish to continue with them. You can also find reports on free sites like ClearScore.
All three agencies use different formulas to calculate your credit score. As such, your score may be slightly different depending on who you go to.

The three leading credit rating agencies use a different numerical scale to determine your credit score, so it’s difficult to say what a “bad” credit score would be. As a general rule, the higher your credit score the better.
The leading agencies do rate credit scores across five categories: • Excellent • Good • Fair • Poor • Very poor Depending on your credit score, you’ll fall into one of these categories. A low score can be due to missed payments, high credit card balances, or lack of credit history. It could also be caused by having any of the below on your file: • County Court Judgements (CCJs), which are a court order for unpaid debt. CCJs negatively impact credit scores and remain on credit reports for six years. Under a CCJ, you must repay in full or instalments as directed by the court. • Individual Voluntary Arrangements (IVAs), which are a formal agreement between a debtor and creditors to repay debts over time. IVAs involve structured, manageable monthly payments and can last up to five years. An IVA helps avoid bankruptcy and offers legal protection from creditors. • Debt Management Plans (DMPs), which are an informal arrangement to repay non-priority debts. Managed by a third party, DMPs involves making reduced monthly payments based on affordability. It helps manage debt without legal binding, but does not protect from creditor actions. There isn’t a credit blacklist or set credit rating that’s guaranteed rejection or acceptance, and different lenders may come to different decisions. Lenders will look at your credit report, your application form, and any business they’ve done with you in the past before they decide.

Some lenders may refuse you if your credit score is very low, while others may offer you car finance but with higher interest rates – it’s at the discretion of the lender.
If you are offered a deal with higher interest rates, make sure you look at your budget again as your total payments will increase. Make sure you can afford the monthly repayments. If you pay your car finance off in full and on time every month, you can actually improve your credit score over time – which could mean you get better rates next time.

You may still qualify for different types of car finance, just be aware you may pay higher interest rates or have certain restrictions in your contract, for example providing a guarantor who will make your payments if you are not able to.
Learn more about each finance type: • Hire purchase (HP) • Personal contract purchase (PCP) Work out whether you want to own the car or not, and check your incomings and outgoings each month and whether you want to own the car or not. Remember that HP and PCP car finance deals usually require a deposit.

Bad credit doesn’t prevent you from getting a new car on finance, but it can make it a bit trickier. We’ll break the steps down here.
Here’s what to consider if you’d rather lease a car with a bad credit score.

Step one: check your credit report

• Get a free copy of your credit report.
• Carefully check for any inaccuracies or outdated information that could be disputed to improve your score.

Step two: set your budget

• Calculate what you can afford per month, thinking about your income, expenses, and any other financial obligations, Money Helper’s budget planner can help.
• Save for a down payment. A larger down payment can improve your chances of approval and might secure you a better interest rate.

Step three: explore different lenders

• Traditional Banks and Credit Unions: While these institutions might have stricter requirements, they sometimes offer better terms for those who qualify.
• Some lenders specialise in working with lower credit scores. • You could also try a broker like Zuto who can look through different lenders to see if they can find something suitable to your needs.

Step four: get pre-approved

• Seek pre-approval from multiple lenders to understand the loan amount and interest rates you qualify for. This process involves a soft credit check that won’t affect your score.
• Compare your pre-approval offers to choose the best terms. Pay attention to the Annual Percentage Rate (APR) and the total cost of the loan, as these will tell you how much interest you’ll pay.

When you apply for credit or request a quote, the lender will check your credit report to see if you’re eligible.
• A soft check is a top-level inquiry into your credit report. It doesn't affect your credit score, and is typically done without your explicit permission. It's visible only to you and to the company or entity that made the inquiry. • A hard check is a thorough credit inquiry made when you apply for a new line of credit, like a loan or credit card. It can have a small impact on your credit score and stays on your credit report for about two years. You need to give explicit permission for a hard check. Always ask whether the check will be hard or soft, because a lot of hard checks in a short space of time could bring your credit score down.

Step five: prepare your documents and choose your car

• You’ll need proof of income and employment, proof of address and a valid ID for the application
• Choose a car you know you’ll be able to afford every month. • New cars depreciate quickly, so consider a certified pre-owned vehicle to save money and reduce the loan amount needed. • Always read the contract and ensure you understand the terms, interest rate, repayment schedule, and any fees involved. Ask the lender for clarification on any points you don’t understand. We cover the full finance application process here.

There’s no fixed price for any finance contract, so you should shop around to find a price that works for you. The amount you pay depends on a number of factors, including:
• The amount you’re borrowing • The length of your contract • Your credit score • The interest rates available • The size of your deposit Generally speaking, you’re more likely to see more expensive quotes if you have a lower credit rating.

Make sure your information is correct and up to date when you apply so you’re getting the right quotes for you.
Beyond this, you could try: • Working to improve your credit score (see our tips below) • Paying off any outstanding debts • Increasing your deposit if you can • Increasing the term of the contract – this will give you longer to pay back what you borrowed and make your monthly payments smaller, but mean you pay more interest overall so make sure you can afford it • Choosing a lower-spec vehicle – which should help keep costs down and reduce the risk for the lender.

• While it may not be possible in the short term, working on improving your credit score can help in the long run. Pay bills on time, reduce debt, and don’t over commit to opening new credit accounts.
• Avoid taking on new debt during the car loan application process as it can negatively impact your credit score. • Stick to a realistic budget to avoid overextending yourself financially. • Consider a co-signer with a good credit score can help you secure a loan and potentially get better terms. However, ensure that the co-signer understands their responsibility, as they will be liable if you default.

First up, check your application form.
Filling it in wrong (anything from writing £100,000 when you meant to put £10,000 or a simple spelling mistake) could result in your being rejected. Make sure you have provided any supporting documents requested by the lender - the lender or broker will let you know what documents they need. You should also check your personal credit report for any errors, as fixing these could improve your score and your chances of approval. Every car finance lender has different criteria, so being rejected from one doesn’t mean you’ll be rejected from them all. Just be aware that if you’re refused car finance multiple times in a short window, this could show up on your credit report and affect your credit score. Remember: you could be refused for car finance if you have a bad credit rating, or if you don’t have much credit history (for example, you’ve never owned a credit card). In both instances, you can improve your chances by improving your credit score. For more information on managing your credit, please refer to the Money Helper. The main credit rating agencies also offer guidance and more information: Experian. Equifax. TransUnion.