We all seem to be at the mercy of our credit score. Some of the biggest financial decisions of our life depend on it. Buying a home or a car will require applying for a loan, for example. And more often than not, whether that application is granted is based on your current financial status.
And yet, the relationship between your credit score and the kind of loans you’ll get offered is far more complex than you might think. A good credit score doesn’t automatically guarantee you’ll get a loan. And a bad credit score won’t bar you from finding a lender. As they say: It all depends.
Can you get a car loan if your credit score is far below perfect? It’s a valid question. In this feature, we’ll go through everything you need to know. Don’t worry if you’ve had financial difficulties in the past. As you’re about to find out, there really always is hope.
Credit score vs car loan: A complex relationship
If you’re looking for a car loan, you’ll most likely apply for one with a bank or a dealership. Although we’ve talked about other options on this blog, these are still by far the most common choices. So whatever strategy you eventually come up with will have to be geared towards them.
And the simple truth is this: Most banks and dealers will at least take your credit score into consideration. True, some will instantly reject anyone with a bad credit rating. This, however, is the exception, not the rule. Even if your credit score does play a role in the application process, other elements factor into it as well.
Yes, a credit score below 500 will probably be a problem. But it is just one of many criteria that banks and dealers take into consideration. If the other criteria do meet their demands, you should still be able to get a loan.
What your credit score actually reveals
To understand why your credit score plays such an important role for a car loan, let’s take a look at what it is actually telling a potential lender.
The credit score is a summary of your financial behaviour. Thanks to it, banks or dealers only need to look at a single number instead of having to browse through your entire files. This will give them a rough indication of whether you’ve handled your finances well in the past or not.
Even many bankers will agree that the credit score is not a perfect tool. It isn’t even the most useful instrument for that matter. Quite on the contrary. It doesn’t, for example, reveal to decision takers whether you’ve paid back your debt in time, missed payments a lot or even defaulted on loans in the past.
Why credit scores aren’t everything
Banks are very well aware that credit scores are far too broad to make any meaningful statements about your finances. So they’ll look at other things, too.
This is both good and bad news. On the bright side, it really does mean that you can get credit if you have a bad credit score. On the downside, it also means that to improve your chances of success, you’ll need to optimise your numbers across the board. Just having a decent credit score is no longer enough.
Among the many potentially interesting numbers, three stand out: Your credit history, your debt status and your income situation.
Your credit history is one of the most important figures when applying for a car loan. It is the basis for calculating your credit score. It provides more detail about your financial behaviour and shows lenders where your weak spots are.
A credit history does not include every transaction you’ve ever made. But it does allow for a pretty good impression of how well you’ve met your obligations. It shows a bank or dealer what kind of customer you are and whether to expect trouble.
Your current debt status is another important signifier. Debt in general, rather than your credit score, is becoming the number one criterion for deciding on a car loan.
Why is this?
Contrary to what you may think, banks aren’t worried too much about you making a late payment or skipping one altogether. They just want their money back. As long as you keep paying eventually, everything is just fine with them. Of course, if you make too much of a habit of delayed payments, they may slap penalty payments on your loan or increase the rate. But they usually won’t force you into bankruptcy straight away.
As long as you don’t have excessive debt, even a credit score below 500 can still work. Vice versa, you can have a reasonable credit score, but pretty high debt – which may be a no-go for lenders.
Another important decision factor is obviously how much money you can spend to pay off your car loan each month. This depends on your current income and your savings. Although banks can not force you to divulge this information, they may reject anyone who doesn’t.
To them, what matters is how much money you have available. To arrive at this number, they’ll consider the following:
- Your current debt
- Your available resources
- Finally, your debt history, i.e. how well you’ve handled debt in the past.
Taken together, these will give you a pretty good picture of your past and present financial situation.
It is this kind of detailed information which lenders would really like. In the overall picture, your credit score can never be more than one piece of the puzzle.
So why the craze about credit scores?
And yet, in practise, the credit score does matter a lot more than it probably should. The reason is that despite its deficits, it considerably speeds up the application process.
This matters, because consumer loans are no longer a bank’s main priority. So, instead of ‘wasting’ precious time on separating the wheat from the chaff, they prefer to err on the side of caution. From their point of view, bad credit scores spell trouble. And trouble is the last thing most lenders want.
In practise, this simply means that, in case of doubt, they’ll simply reject your application.
Different credit rating agencies, different credit scores
To add insult to injury, there is no such thing as a single credit score in the UK. Instead, various agencies are bidding for supremacy on the market. Even if you discount the many smaller enterprises, this still leaves you with three major credit rating agencies. Each of them has its own system of calculating scores. And each, therefore, will be different.
Experian is by far the biggest of the three majors. If you only want to optimise one score, then this one should be it. However, Equifax is not trailing far behind. And Transunion has its supporters, too.
Do you need to monitor all three credit scores?
All three rating agencies approximately use the same fundamental data to come up with your score. In theory, you could have a very good Experian score and an abysmal Transunion rating (also called your Noddle score). And it does indeed happen. It is, however, quite rare.
Out advice is to focus on one of these ratings and leave the others be. When you’re financing your car, you have enough to worry about as it is. Just take a few sensible steps to improve your credit score as much as you can. In most cases, everything you perform on top is just a waste of time and energy.
What is the very lowest you can go?
Instead, let’s take a look at concrete numbers. Experian essentially uses the same credit score in the UK and the USA, which allows for some useful comparisons.
A good Experian credit score starts at between 721 points. Anything above that, and you have your foot in the door. Anything below that, and things could get difficult.
But how far can the score drop before it gets critical?
Curiously, there doesn’t seem to be an absolute low. As moneysaving website Nerdwallet writes:
“If your score is below about 700, prepare for questions about negative items on your credit record and be able to document your answers, says Mike Bradley, Internet sales manager at Selman Chevrolet in Orange, California. Matt Jones of the automotive shopping site Edmunds.com says the number may be closer to 680. Under 500 means you won’t qualify for an attractive interest rate. It doesn’t mean you can’t get a car.”
Sounds great? Yes. But you’ll have to take the latter statement with a grain of salt.
Researching the scale
Let’s take a closer look at the Experian rating scale to see, exactly, what we’re talking about here.
You can score a maximum of 999 points overall. Anything above 721 constitutes a good score, as mentioned. See the Experian site for a closer break down of these figures. Below that, however, not all scores are equally ‘bad’.
- 561-720 is considered a ‘poor’ rating.
- 0-560 is considered a ‘very poor’ rating.
This distinction matters. As Experian themselves write, a very poor rating means that “you’re more likely to be rejected for most credit cards, loans and mortgages that are available.”
A ‘poor’ rating, meanwhile, is not a reason for not extending a car loan. It does have some other serious consequences. In the next sections, we’ll look at these two scenarios in a little more depth.
Getting a car loan with an Experian rating below 721 but above 561
If your rating is poor, it probably means you’ve had some financial difficulties in the past. Maybe you’ve missed a payment or two. Maybe you’ve had to borrow quite a lot over a longer period of time just to make ends meet. If so, this is actually very relevant. Lenders are always on alert if your debt to income ratio is biased strongly towards debt.
Either way, such a rating usually doesn’t mean that you’ve ever defaulted completely on a loan. And, truth be told, the differences between a score of, say, 680 (technically poor) and 721 (at the outer most extreme of the good part of the scale) are not very big.
Banks and dealers know this and so they’ll usually still consider you for a car loan. They will, as indicated above by car finance expert Matt Bradley, ask for more background information. But in general, getting a car loan is still possible.
However, the risk of such a loan is obviously higher than average. Interest rates will therefore rise accordingly. You may also have to make a higher down payment. Lenders may also be stricter with enforcing punitive measures in case of a late or missed payment.
Getting a car loan with a rating below 561
If your rating drops below the magical mark of 561, things start looking bleak. This is the ‘very poor’ zone and generally speaking, anyone inside this zone can forget about buying a car.
Or can they?
Although your chances are slim, there are a few steps you can take to improve your chances of securing financing for a car:
- First off, check if your credit score is really correct. Mistakes happen more regularly than they should. And if you’ve hit rock bottom, every little bit helps.
- If your financial trouble dates back a few years and you’ve now improved your situation, gather as much financial data to prove it. We’ve spoken about the factors that really matter: Debt, income, savings. Show to your dealer or bank that you’ve made significant progress in all three areas.
- Check to see if your scores with the other two major rating agencies are possibly in the ‘good’ or ‘poor’ part of the scale. Your lender may not go with this, but it’s worth a try.
- Improve your credit score. We’ve written extensively about this on our blog. So use the information available here to familiarise yourself with how to get your score up again.
Alternative financing options
Up until now, we’ve mainly discussed getting a car loan with a bank or a traditional dealer. Although this is still the route most travelled, there are other options at your disposal.
If your credit score is somewhere between 0 and 720, your best bet is to secure a car loan with a dealer specialising in bad credit financing. With these dealers, the credit rating is no longer the most important piece of information. And so, you can get a loan even if your rating is well below what a bank would accept.
How does this work?
Most banks and dealers will first set interest rates and the loan term according to the risk of the financing and then calculate the monthly payment. This means that, all equal, your monthly payment rises in step with the interest rate.
At CCC, for example, the process works the other way round:
- We first establish what you can pay each month.
- Then, we set the interest rate and loan term which you’d need to get there.
As long as these factors are still reasonable, we’ll accept your bid, even if your credit rating is less than optimal.
One reason for not accepting an application could be that your income is so low that you can only afford a tiny payment each month. This would mean that it would take forever to pay back the loan. And that just doesn’t make sense for either party.
Other than that, however, your chances of getting a car loan are pretty good. So drop by our Manchester showroom to see how we can help you get a great car at a great price.