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Weighing the Pros and Cons: Financing a Car with Bad Credit

Weighing the Pros and Cons: Financing a Car with Bad Credit

10 January 2024 Concept Car

The title to this article may be confusing. Bad credit, for many UK drivers, is an issue. How can there be positive aspects to financing a car with it, then?

And yes, it is true: Bad credit can limit your options and affect the terms of your loan. We’ll get into some of the negative aspects later in this article.

Here’s the thing, though: The alternative to not financing your car with bad credit will often be to not finance it all. And that comes with its own serious downsides.

Still, you may ask yourself:

Can I get car finance at all with bad credit?

Our answer based on many, many years of experience as a leading UK car finance provider: Absolutely.

Despite the hurdles, financing a car with bad credit may still be a viable option for those in need of reliable transportation.

In this comprehensive article, we will explore the pros and cons of financing a car with bad credit, paying special attention to the strain it can cause, the implications it carries, the importance of budgeting, and the impact on your future, independence, mobility, and vulnerability.

By understanding the various factors involved, you can make an informed decision that aligns with your financial situation and goals.

Want to know more? Get in touch! Our team can help you get the car loan you need. Call us at 0800 093 3385. Or use our contact form for a free quote.

Pros #1: Get the job you want / need

Cars are no longer a requirement for as many jobs as they used to be. Public transport can do the trick, sometimes even a bike can.

But this doesn’t always hold true. Sometimes, you will need a car to even be considered.

If this is the case, even bad credit car finance is preferable to not getting the job at all: it improves your job prospects. Especially since an employment will provide you with additional income which you can use to pay off your loan.

Pros #2: Opportunity to improve your credit score?

Especially when you have bad credit, you may focus on risks. That’s not a bad thing per se. After all, there’s a lot to be said for being cautious.

Surprisingly, perhaps, it can equally make sense to use bad credit car finance as an opportunity to improve your credit rating.

How does this work?

Financing a car with bad credit requires making regular and timely payments. Consistently paying your car loan instalments on time demonstrates financial responsibility and a commitment to meeting your obligations. This positive payment history is reported to credit bureaus and can gradually improve your credit score over time.

What’s more, by adding an instalment loan, such as a car loan, to your credit mix, you diversify your credit profile. Lenders like to see a healthy mix of credit types, including both revolving credit (e.g., credit cards) and instalment credit (e.g., car loans), as it indicates your ability to manage different types of debt responsibly.

Finally, financing a car with bad credit and making regular payments reduces the percentage of available credit you’re using, which is known as credit utilization. Lowering your credit utilization ratio can have a positive impact on your credit score.

However, it’s important to avoid taking on additional debt that could increase your overall credit utilization.

Pros #3: Enhanced Independence and Mobility

Financing a car with bad credit can provide you with enhanced independence and mobility. Owning your own vehicle allows you to travel at your convenience, providing flexibility and freedom in your daily life.

You can easily commute to work, run errands, and pursue personal activities without relying on public transportation or others for transportation.

This increased independence and mobility can significantly improve your quality of life and broaden your horizons.

Pros #4: Access to better cars

Need a car but your credit score is low? For many drivers in the UK, this means that they’ll have to pay the car outright. After all, if you can’t get a loan, what else can you do?

A far better solution is to apply for a loan with a dealer specialising in bad credit car finance. At CCC, for example, we can work out a personalised payment plan which will take your specific financial situation into consideration.

As a result, you can select from a wide range of automobiles. All of our cars are in excellent shape and have been thoroughly inspected. And since you’re buying on finance, you should typically be able to afford a much better car than you would have without a loan.

Pros #5: Hold on to your savings

Experts like to emphasise the benefits of paying for a car outright. Often, they will explicitly single this out as an essential part of financial health.

We do agree that buying a car outright is great. However, it’s really only great if you have enough on the bank. Paying for a car, even a used one, in cash is going to cut into your savings. That’s money you won’t have in case of an emergency.

This is why opting for finance, even if you have a less than perfect rating, can turn out to be a safer solution.

Pros #6: Financial discipline

Discipline doesn’t sound like a lot of fun. But it can be very useful. This is especially true if you’re under severe strain from a bad credit score. Because it forces you to spend responsibly and, a bad credit car loan can ironically turn out to be a great support for those with financial issues.

Financing a car with bad credit requires careful budgeting and planning. It forces you to assess your current financial situation, evaluate your income and expenses, and determine how much you can realistically afford for monthly car loan payments.

This exercise helps develop a disciplined approach to managing your finances and encourages you to prioritize your expenses.

In short: You’ll become better at managing debt.

What’s more, all of this requires managing debt effectively. It teaches you the importance of monitoring your debt-to-income ratio, keeping your debt levels manageable, and avoiding taking on excessive debt. By being mindful of your borrowing capacity and making responsible borrowing decisions, you develop stronger debt management skills.

Finally, taking on a bad credit car loan can prompt you to consider your long-term financial plans. It encourages you to think beyond immediate needs and evaluate how the car loan fits into your overall financial picture. This may involve developing a long-term financial strategy, such as building an emergency fund, saving for retirement, or investing in other assets.

It’s important to note that improving financial discipline takes time, commitment, and consistent effort. By taking on a bad credit car loan and managing it responsibly, you can develop crucial financial habits, strengthen your discipline, and enhance your overall financial well-being.

Pros #7: Building value

Yes, buying a house or a car is expensive. Very expensive even. For many of us, these are the two most important items we’ll ever buy in our lives.

But at the same time, they are also investments. A house more so than an automobile, admittedly. But at the moment, with cars in high demand, a used car is a great way to build value for the future.

Financing a car through bad credit car finance allows individuals to become owners of an asset that can provide long-term value and utility, unlike renting or relying solely on public transportation.

It will also come in handy when applying for your next car loan!

Cons #1: Risk of Negative Equity

Let’s not beat around the bush: Financing a car with bad credit carries the risk of negative equity. Negative equity occurs when the value of the financed vehicle depreciates faster than the loan balance decreases. This situation can arise due to factors such as high interest rates, long loan terms, or rapid depreciation of the vehicle’s value.

If you decide to sell or trade in the car before fully repaying the loan, you may owe more on the car than its current market value. Negative equity can limit your options and create challenges when transitioning to a new vehicle or refinancing the existing loan.

Financing a car with bad credit can put a strain on your finances, but it also provides an opportunity to develop effective budgeting skills. It requires careful budgeting to allocate funds for monthly car loan payments while ensuring that you can meet your other financial obligations.

As we mentioned earlier, this can be an opportunity. But it is obviously a challenge as well, since you may bite off more than you can chew.

Cons #2: Higher Interest Rates

One of the significant drawbacks of financing a car with bad credit is the higher interest rates imposed by lenders.

In fact, for most with bad credit, these levels are too high for them to be able to accept the loan. And even if you can pay them off somehow, higher interest rates will make your monthly payments more expensive and potentially strain your budget. Some have even called this type of lending “predatory.”

And yet, there is very little that you can do about this. Lenders simply consider individuals with bad credit as higher-risk borrowers, resulting in elevated interest rates to compensate for the perceived risk.

At CCC, we offer solutions around this issue by setting the monthly rate according to what you can safely afford. This way, interest rates will be higher, but never too high for you.

Cons #3: Limited vehicle choices

A bad credit car loan will give you far more choices than buying a car with cash. But it goes without saying that your choice will still be limited.

Some models or trim levels will forever remain out of reach if you have a bad credit rating. Also, many dealers specialising in bad credit car finance simply do not have as many models to chose from compared to “regular” dealers.

That said, at the right dealership, your selection can still be pretty great. At CCC, for example, out selection includes all major brands, most of the popular models and many different price levels.

Also, there’s no need to feel bad. Choice will be limited for 99% of buyers in some form. Focus on what you need and you’ll be surprised how many great cars are still within your budget.

Cons #4: Limited Loan Options & Stricter terms

Having bad credit can limit your loan options and result in loans with higher interest rates, stricter terms, or additional fees.

It is crucial to carefully compare loan offers, read the fine print, and consider the long-term costs before making a decision.

Cons #5: Financial Strain and Consequences

Financing a car with bad credit can impose financial strain, primarily due to higher interest rates and potentially larger monthly payments.

As we already discussed, lenders may charge higher interest rates to compensate for the increased risk associated with lending to individuals with bad credit. This can result in higher overall loan costs and monthly payments that can strain your budget.

Just as importantly, financing a car with bad credit can have implications on your credit and borrowing abilities. It is crucial to understand that taking on additional debt through a car loan can affect your credit score. Missed payments or defaults can further damage your credit history. This may impact your ability to secure future loans and may result in higher interest rates for future borrowing needs.

This is why it’s so vitally important to make on-time payments and use the opportunity to rebuild your credit in order to improve your financial standing.

Get help at CCC

Worried about bad credit car finance? At CCC, we know all about it. Many of our customers were hesitant as well. And yet, every day, they drive off our lot as the satisfied new owners of a beautiful used car.

Would you like to join them? Then our team is looking forward to hearing from you.

Get in touch! Give us a call at 0800 093 3385. Or send us a message using our contact form.

10 January 2024 Concept Car