What credit score do you need for car finance?

What is car finance? 

Car finance is a way to borrow money to buy or lease a car. You can get car finance from both car dealerships and banks. There are different types of car finance, all with different implications for car ownership and usage. 

• Hire purchase (HP) 

With HP you pay a deposit then make monthly payments (including interest). You can drive as many miles as you like, and you will own the car after you’ve made the final payment. 

• Personal contract purchase (PCP) 

PCP is most commonly offered on new cars. You pay a deposit and make monthly repayments (including interest) which cover some of the remaining value of the car. Payments tend to be lower than for HP, but PCP deals come with mileage restrictions. 

At the end of the contract, you have the option to make a large final ‘balloon’ payment to own the car. Alternatively, you can return it, or take out a new PCP contract on a different car.  

• Personal contract hire (PCH) 

PCH works like a long-term rental agreement. You pay a deposit and make monthly payments for the use of the car. However, you can’t buy the car at the end of the agreement. PCH is usually used by businesses, not individuals. 

• Car loan 

A car loan is a type of personal loan used to buy a car. You’ll own the car from day one and make monthly payments (including interest) to the loan provider.  

In general, being rated good, very good or excellent on each CRA scale, will improve your chances of being approved for car finance. The deals you are offered are likely to be cheaper too. 

Some of the 0% APR or zero deposit deals you’ll see advertised may only be available to people with a good or excellent credit rating. 

If you have bad credit, HP can be the easiest form of finance to get as the car is owned by the HP company up until the final payment. But higher interest rates can mean HP might work out expensive compared to PCP. 

You might find it more difficult to get a car loan or personal loan if you have bad credit. This is because personal loans are unsecured, making them riskier for lenders. 

What else do car finance providers look at when you buy a car?  

Your credit score is just one factor that will impact how much you pay for car finance. Others include: 

• The type of car finance. PCP contracts tend to be cheaper than HP each month – but the balloon payment at the end can be significant. 

• The term of the agreement. A longer term will mean lower monthly payments, but the total cost will be higher. 

• The package. Maintenance and repairs are included in some agreements. PCP and PCH deals both come with an annual mileage allowance. 

• The size of your deposit. The bigger your deposit, the better, regardless of the type of car finance you take out. 

• Fees and charges. Some car finance deals come with arrangement fees, early repayment charges or late payment fees. 

Will having car finance affect my credit score? 

Yes, taking out car finance will affect your credit score. The lender will run a hard credit check before offering you a deal. 

Once your agreement is up and running, your repayments will be reported to the CRAs. 

If you make payments on time, your credit score could go up. But missed payments will have a negative effect on your credit score. 

Can you get car finance with bad credit? 

Yes. Some lenders offer car finance deals designed for people with bad credit.  

These deals are likely to be more expensive, but there are ways you can keep costs down. These include: 

• Opting for a cheaper car or one which won’t lose its value as quickly 

• Choosing a longer term to reduce monthly payments (but you’ll pay more in interest overall) 

• Putting down a bigger deposit  

• Getting a guarantor  

How can I improve my credit score for car finance? 

• Pay debts on time and don’t miss payments for household bills 

• Be registered on the electoral roll at your current address 

• Join the Rental Exchange Initiative  

• Close any credit accounts you no longer use 

• Check your credit report(s) for mistakes and signs of fraud 

• Reducing the amount of other credit applications in the six months before applying for car finance 

You can read about quick ways to improve your credit score here.