As you’ll soon see, having a poor credit history isn't the be-all and end-all when it comes to financing a new car.
If you’ve got your eyes on a new set of wheels but your less-than-perfect credit history is holding you back, all is certainly not lost.
As with any type of lending, your credit history will contribute to the type of finance deal you’re offered. How? Well, quite simply, the better your credit history, the better terms (i.e. interest rate) you’ll be given.
So, even if you have poor credit, you could certainly still be eligible for financing options like a personal, secured or guarantor loan, credit card for bad credit, hire purchase agreement, personal contract purchase or a non-status lease. If you’re accepted, though, you may find the interest rate is slightly higher, which means you’ll end up paying back more in total.
Do you really need it?
First things first, if you’ve got a poor credit history, ask yourself, do you really need to purchase a new (whether it be first or second hand) car right now? If it can wait, from a financial perspective, it might make more sense to hold off.
During this cooling off period, you can access your credit report, identify what’s dragging your score down, and then take steps to gradually improve it. By doing this, you could improve your credit score over time, which will, in turn, open you up to more attractive car financing deals.
Your car financing options
If you’ve got a poor credit history, the following car finance options are still available to you. As we just touched on though, your history might a) mean you’re less likely to be accepted, and b) decrease the competitiveness of your terms if you are accepted.
To make sure you’re getting the best deal possible, whichever option you go for, you should always do lots of research and compare several quotes before taking out any form of finance.
1. Personal or secured loan
The value of the car will largely determine whether you opt for a personal or secured loan. Personal loans for poor credit are typically available for between £100 and £10,000, and secured loans are generally for around £10,000+.
If you’re considering taking out a secured loan to finance a car though, more often than not, you’ll need to own your own home as this is used as security against the credit. Because the lender has this extra layer of security, you may be more likely to be accepted, even with a poor credit history. Bear in mind though, if you’re unable to repay what you owe, your home could be at risk.
2. Guarantor loan
From a being-accepted perspective, guarantor loans are a very viable option if you have poor credit. The reason for this is that lenders have extra assurance they’ll get their money back if, for whatever reason, you’re unable to repay them yourself.
However, because you’re asking someone to put their finances on the line for you, they can be harder to secure in the first place.
If you’ve got enough savings stashed away to finance your new car outright, your poor credit history needn’t come into the equation - making it the cheapest and easiest option. You’ll not have to repay interest, you won’t have monthly instalments hanging over your head, and you’ll have the peace of mind that the car is completely yours.
4. Non-status lease
Non-status leases are designed with people with poor credit in mind. They’re not offered by all lenders and car dealerships, but they’re worth shopping around for if you can.
With this type of lending, your credit history isn’t the main driver behind your application. Instead, lenders take a more general look at your circumstances as a whole; which is why you may find you’re more likely to be accepted.
A couple of things to bear in mind include:
Your monthly repayments. Because non-status leases pose a greater risk to lenders, the monthly instalments can be quite expensive.
You won’t own the car outright. You will, however, have the option to give the car back and walk away, get a new car, or pay a pre-agreed sum to own the car outright, at the end of the term.
5. Personal contract purchase
In many ways, this is just a type of loan designed specifically for car purchases. There are a couple of fundamental differences to choosing a personal contract purchase over a traditional loan though, and these are:
You won’t pay off the full value of the vehicle
Unless you pay a lump sum at the end of the term, you won’t own the car outright.
As with a standard personal or secured loan, if you’ve got a poor credit history, you may find the interest rate attached to your personal contract purchase offer is higher than that offered to someone with a good credit history.
6. Hire purchase
Last but not least, you could look into a hire purchase agreement to finance your new car. With this option, the car would be your lender’s property for the duration of the contract. As a result, if you miss any payments, they’d be within their rights to take the vehicle away.
Because of this added security though, even with your poor credit history, you may find you’re more likely to be accepted for a hire purchase agreement than you would with other car financing options.