Guide to financing a car with bad credit

If you are aware of the fact that you have a less than ideal credit rating, you might well be worried that you won’t be able to get car finance. This, in turn, can make life difficult, especially if you need a car to commute to and from work or for the school run.

In some areas, public transport is a viable and reliable alternative, but if this does not apply in your case because of where you live, your working hours, or the nature of your job, then not having a decent car can have a significant impact on your quality of life and ability to earn your income.

This guide explains how lenders look at your credit file, and what options may be open to you if your credit score isn’t great at present. We also look at whether or not you can get car finance based on disability benefits, or following bankruptcy. How car finance might impact on a current or future mortgage is also covered. 

Can I get car finance with a bad credit history?

A poor credit rating does not necessarily mean you can’t access car finance. However, it may mean that you cannot benefit from the very best interest rates out there. There are specialist brokers that can find affordable finance packages for people in this position though.

What checks are done for car finance?

When considering whether you are a safe bet, a car finance lender will check your personal details, including whether or not you’re employed, your income, age, and how much you want to borrow. They will also look at your existing credit file, and this can be done using either a ‘soft’ or ‘hard’ credit check on your credit history.

Soft credit check

A soft credit check is an initial look at your credit file, to give the lender an ‘at a glance’ guide to your past reliability in making repayments. Such a check will not show up on your file. This can be crucial, as too many ‘hard’ credit checks can affect both your rating and your future chances of obtaining finance - including a mortgage. It’s best, therefore, to ensure lenders use a soft check in the first instance.

Hard credit check

A hard credit check does show up on your file, and a number of checks in a short space of time can lead lenders to believe that you are facing financial difficulty. They might therefore see you as high risk, and either refuse to lend you money or only offer very high rates of interest. It’s thus wise to try to and make sure lenders do not do a hard credit check too early on in the application process.

How to get car finance with bad credit

If you want to buy a car on finance and know you have a poor credit rating, you could approach specialist brokers that have experience in finding the best deals for people in such circumstances. They should know how best to obtain the most favourable rates available to borrowers like you and also have access to a broad range of smaller, lesser known lenders from across the marketplace.

Such brokers will often be very aware of the importance of performing only a soft credit check in the first instance, proceeding with a hard credit check only when absolutely necessary. If in doubt, check with the broker you use that this is the procedure they follow.

What credit score is needed for car finance?

What is your score?

The first thing to do is to find out your current credit score. If possible, it’s best to do this three to six months before a major purchase like a car. If you need to make improvements to your rating, then this gives you some time to try to do this.

There’s no definitive answer

The credit rating you will need for car finance depends very much on the lender’s criteria - which can differ greatly. Lenders may use their own model for credit scoring, and what is prioritised when calculating this can vary from one lender to another. The range of potential scores can also be different. For instance, FICO Auto Score 8 ranges between 250 and 900, whereas VantageScore 3.0 scores have a narrower range of between 300 and 850.

Can I get car finance on disability benefits?

If you are unable to work due to a long-term health condition or disability, then you may think that you cannot get car finance. For some, the charity Motability can help, but this does not mean they offer the best deals around. Many of Motability’s packages take up the claimant’s entire Personal Independence Payment (PIP) or DLA (Disability Living Allowance) Mobility component.

If you want to try and get a better deal, or Motability is not an option, then it can be wise to use a specialist car finance broker. They will be experts in obtaining finance for those who might otherwise find this difficult. Such companies will use lenders who do take a steady benefit income into account when calculating finance, whereas some major lenders do not count benefits as income.

How to get approved for car finance

The best way to get approved for car finance is to ensure your credit score is as good as it possibly can be. Lenders are also more likely to offer finance if you are permanently employed and have a steady income. The amount they are likely to lend will depend on their judgement of your ability to make the repayments. Your age can be crucial, as a young borrower with no existing credit file is seen as a far higher risk than someone decades older who has previous loans they’ve repaid. Homeowners are also more likely to accepted for credit – as long as they have kept up with their mortgage payments.

Improving your recent score is the best thing you can do to ensure you are approved for car finance. Obtaining your score is the first step, and if anything seems incorrect, contact the provider of the credit report without delay. Otherwise, making repayments on time and keeping your credit card balance low should help to improve your score, and in turn your chances of acceptance.

Can car finance affect your mortgage?

All forms of finance could potentially affect your mortgage, in two main ways:

Credit rating

Your credit score will determine what mortgage deals are open to you. Those with the best scores should be able to obtain the most preferential rates, while those with a low rating may only be able to access mortgages with higher interest rates that will cost more.

Unsecured loans

A personal or unsecured loan also has the potential to affect your mortgage, although only in a less direct way. This kind of loan is not secured on your car, so if you did not keep up with the repayments the lender could take the case to court. In this instance, your home could possibly be at risk.

Can I get car finance after bankruptcy?

If you’re declared bankrupt, you may think that you will never be able to get car finance again – but this is not necessarily true.

A discharged bankrupt

Bankruptcy normally lasts for a year. Once this time has passed, you should be told in writing that you are now classed as a ‘discharged bankrupt’.

When to reapply

It’s not best practice to apply for car finance right away as a discharged bankrupt, as this could have a negative impact on your credit rating. Ideally, you should wait another year before applying for any kind of finance. In the meantime, you should endeavour to build up your credit score, thereby giving yourself the best possible chance of being accepted.

A damaged score

Unfortunately, having been bankrupt is highly likely to have caused severe damage to your credit rating. This means that even if you can secure finance, it is very probable that it will cost you dearly. This is because you will be excluded from the better deals in the marketplace.

If you’re still bankrupt

Even a specialist worker will not be able to assist if you are currently bankrupt. That law states that you cannot take out further credit, at the sort of sum needed to buy a car, while you are bankrupt.

Help is available

Once more, a specialist broker may be able to help after bankruptcy. In the first instance, they can advise on your chances of being accepted, and the best course of action to take according to the timeframe. Their experience will help you find the best car finance options that are open to you, and these can often come from smaller, lesser-known lenders that you might not have otherwise known about or considered approaching.