Cars are among the most expensive purchases you’ll ever fork out for – even second-hand vehicles can set you back a fair sum.
If you don’t have the money available to buy a new motor outright, there are car finance options available. But what are these lenders looking for, and can a history of bad credit stop you from getting a new car?
Read on to find out.
There are several different types of car finance available, with dealer finance and hire purchase agreements among the most popular. And as with most forms of credit, lenders will want to see your credit history as a way of determining whether you’re a responsible borrower before they lend to you.
Your credit history is a record of all the credit you’ve taken out over the past six years or so, along with other financial information – like whether you share finances with someone or have a mobile phone contract, for example.
If you make a payment late or miss it altogether, this will show on your credit history. If you’ve had to get formal help with your debts, such as through an IVA, this will also show up.
Lenders want to see that you are a responsible borrower and they do this by checking that you never miss your monthly repayments on loans or minimum payments on credit cards and that you haven’t maxed out your existing channels of credit.
If you have borrowed more than you can afford to repay, or you’ve missed payments, this will act as a mark against you when lenders are considering your application. They may agree to lend to you but for a higher interest rate than you applied for, or they may simply turn your application down.
As you can see, a good credit history can really work in your favour when you apply for car finance.
The end of the road?
That’s not to say that you’ll be unable to get your hands on any car finance if you have a patchy credit history. It all depends on what the damage is.
If your credit history is spotless, you have a better chance of getting your hands on the most competitive deals. If your credit history is far from perfect, these deals will be out of your reach – although there are some car finance providers who specialise in customers who’ve struggled with borrowing in the past.
What are my options?
You could consider a hire purchase agreement (HPA). With a HPA, you pay a deposit and then make one payment a month that goes towards paying off the outstanding balance on your car.
The money you owe is secured against the car. This acts as a safety net, as if you miss your repayments, the lender has the right to repossess the vehicle from you.
HPA comes with a fixed interest rate, and the better your credit history the better the interest rate you’re likely to be eligible for.
Another option is dealer finance. This is essentially the same as a personal loan, but it’s offered through your car dealer.
Again, your credit history will affect whether you’re accepted and the interest rate you get. However, if you’re thinking of taking out car finance we advise shopping around other lenders to see if you can find a more competitive offer. Car finance deals can be quite expensive when offered by a dealer, so it’s good to do your research and make sure you’re getting the best deal you can.
If you’re thinking of applying for some form of car finance and want to give yourself the best chance of being accepted, read our guide to improving your credit history in just three months.
Disclaimer: All information and links are correct at the time of publishing.