Are you in need of a car but afraid you won’t get accepted for credit? In this feature we’ll fill you in on everything you need to know.
Find out …
- … that your chances of getting accepted are actually pretty good even if your credit score isn’t.
- … that it’s usually not a question of getting accepted but of accepting the price of acceptance.
- … which loans are okay and which you should avoid.
- … how you can improve your chances of not just getting a loan, but of paying less for it.
Does that sound like what you’re looking for? Then let’s dive in to help you get the loan you deserve.
It’s usually not a question of getting accepted.
This may come as a surprise. But here’s some good news: If you really want a car loan, you are going to get one.
If your credit rating is very low, it probably won’t be a bank loan. For one, banks rate your credit score very highly. They’ll often consider it the single most important piece of financial information. Secondly, banks are tied to very strict rules and regulations when it comes to lending. So even if they would like to extend credit to you, they may legally not be allowed to do so.
Banks, however, are no longer your main destination for car finance anyway. Over the past two decades, dealerships have all but completely taken over the market. And their criteria for acceptance or denial are a lot more lenient.
You can even get car finance with bad credit.
In practise, this means you can still get accepted for a loan if you have bad credit.
For a dealer, extending credit to someone with a below-average credit score isn’t ideal. But it does not represent a huge risk either. If you default on the loan, they can usually simply sell off the car at a very good price. Margins on second hand vehicles are excellent, after all.
This is also why payment plans like PCP and HP have found such widespread success: To our parents’ generation, it would have been unthinkable to finance a car this way. To many people today, however, these schemes are great: You can get an incredible, new car at an affordable monthly rate and switch to another one after three years (PCP) or end up the legitimate owner at the end of the term (HP).
The risk, however, is entirely on you here. If you can no longer keep up the payments, you lose the car – and your entire investment in it.
Is the price right?
But the risk of losing the car in case of payment issues is not the only thing you should worry about.
Lenders do want to be compensated for the fact that they are offering loans to those with low ratings. And so, the costs of a car loan are directly connected to the likelihood of a default.
Which simply means that you can still get credit even with a really low rating. But it IS going to cost you. There is a cut-off point at which car finance becomes a lot more expensive and you suddenly go from interest rates around the 5-10% mark to an APR of 30%.
There’s nothing wrong with these prices. In fact, depending on how you want to pay off your loan, we also have interest rates in that range. The thing is that you can improve your interest payments if you can improve your financial situation.
Your credit rating is key here.
Your chances of acceptance for a good car loan depend to a large degree on your credit score.
With this in mind, what credit score should you be aiming at?
There are three major credit rating agencies in the UK, Experian, Equifax and TransUnion. (There are a lot more, but they are either extremely specialised on one industry or too small to be relevant.) Using complex calculations, these rating agencies determine your score. In doing so, they pre-decide your chances of credit acceptance.
Although they use slightly different techniques, the general approach is the same for all of them: At the end of the process, you will either have a very good, a good, an average, a poor or a very poor score.
Simple, right? Not quite.
Have you read:
What are the most important credit rating agencies?
Your score with the big three need not be identical.
This is one of the aspects which can make things a little more complicated. All major rating agencies use pretty much the same data. So they should come up with pretty much the same score.
Interestingly, this is not always the case. You can have a good credit score with Experian and an average one with TransUnion. You can even slip down into poor territory with one agency, despite being in the safe zone with the other two.
Clearly, this makes improving your credit acceptance chances harder.
And then, payments (or a lack thereof) remain on file for a long time. If you missed a few big payments four years ago, your current score may suffer from it, even though you’ve long cleaned up your act. How can you reflect your improved creditworthiness to your potential lenders?
In the next section, we’ll go over the different options for increasing your credit score and getting a better deal.
What score should you be aiming at?
This is an important question. Many drivers in the UK with a bad credit rating have given up hope. To them, it seems as though they can never return to a good score, let alone a very good score. And so, they will sometimes resort to payday loans or other obscure means of finance just to avoid having to go through the demeaning application process for regular car credit.
The thing is: You don’t need to get a very good credit score. You don’t even need to get a good one. What matters is to get into ‘average’ territory. This is the cut-off point we were talking about earlier. Anything below average will become very expensive. And for anyone below poor, it will become hard to find finance at all.
So your goal should be to get from very poor to poor or, if possible, from poor to average.
The first step consists of checking your credit score to see where you are on the scale. You may be just a few points away from your destination. If so, making that decisive jump may be a lot easier than you think.
Have you read:
Can I get a car loan if my credit score is below 500?
Do you need to optimise across all rating agencies?
This is a sensible question, but a hard one to answer.
You can not know which agency your lender is working with. So if you’re really unlucky, they will work with one with whom you have a bad rating – instead of the other two, where you’re doing fine.
Theoretically, you would therefore need to optimise your score with all three rating agencies. In practise, this is obviously too much work and hard to do. Especially since you will never know the intricacies of how these companies arrive at their scores.
In our opinion, it is best to merely optimise for a single agency. Usually, by increasing your score there, you’ll also drive up your scores with the other two.
Since Experian is the biggest and most widely used rating service in the UK, they’re a good place to start.
Some simple rules
There are lots of expansive guides on the web about how to improve your credit score. We’ve also written a few. We do think that following such a guide can be very useful. Ultimately, however, it’s pretty clear what you’ll need to do.
Most experts will have you look for mistakes in your credit history. That’s not a bad recommendation per se. But it’s very unlikely you’ll find any.
Here are the most important steps to take, boiled down to a few simple rules:
- Pay off as much of your outstanding debt as you can. The problem with existing debt is that it eats into your current cash flow. In a way, too much debt creates even more debt. Even small payments can make a difference.
- Consolidate different small accounts into (ideally) one or (if need be) two bigger accounts. This makes it easier to keep track of your progress.
- Set up standing orders for all recurring payments – if possible. Your credit score depends on how reliably you pay your bills. Standing orders are an excellent way of preventing you from forgetting.
- Start building up a better score (more on that in a second).
Have you read:
How to improve your credit score
Build credit with … a credit building card.
It’s ironic. But the best way to recover from debt problems … is to start spending.
Yes, that’s right. It is only through spending and demonstrating reliability that you can show to potential lenders that they can trust you.
To do this, start with the steps from the previous paragraph. Mainly, reducing debt and eliminating all unnecessary accounts. Then, get yourself a prepaid credit card. These are designed to work like credit cards, so you can go shopping with them just like you would with an Amex or Visa card. But they are usually connected to your current account. Meaning, they’re more like a debit card.
Ideally, you should now use this card to buy just about anything you need. If you make sure the account is always filled up with enough cash, your credit score will gradually start to recover and rise.
It’s a great and effective way to work yourself back to a point where you will no longer have to worry about credit acceptance anymore.
What about Experian Boost?
Experian Boost is a tool which allows you to re-calculate your score with this rating agency at the push of a button.
It is free, will never result in a lower score and you can always take it back in case you no longer feel happy about it. What’s not to like?
If you’re using Experian, it’s probably best if you apply Boost to your score. From a psychological point of view, it’s a useful tool and it may even lift you up over the threshold of a poor or average score.
On the other hand, lenders can see that you’re working with Boost. They’ll know, therefore, that your ‘regular’ score is lower than the one on display. So they may end up ignoring it.
We don’t really see any harm in using Experian Boost, as long as you realise one thing: This easy way of boosting your score should never detract from the fact that improving your rating is hard work.
Have you read:
Is Experian Boost a Rip-Off?
Improve your general creditworthiness
Your credit score is an important part of improving your credit acceptance chances. However, it is certainly not the only one. Many banks and almost all dealers will also apply a plethora of other factors to decide whether to offer you a deal – or at what price.
Some may not even use your credit rating at all.
The following are important elements of a strategy to increase your chances of a decent offer:
- Increase your income to debt ratio. Reducing debt is one way to do this. Increasing your income is another. Income is one of the key components too many borrowers forget to consider. You don’t need to take on a second job to achieve this. Going from 30 hours to 32 hours per week can already signal that you’re serious about making a change.
- Increase your savings. If you are suddenly faced with financial problems, your loans are usually first to take a hit. With enough savings on the bank, you can mitigate the impact of these issues.
- Find a guarantor. It takes two to tango, and buying a car is a little bit like a dance. Certainly, if you can find someone to cover for you, this can be a tremendous boost to your application. Family members are your most obvious choice for a guarantor. But sometimes a friend will also be willing to assist.
Increase your downpayment
You don’t like all that talk about down payments. We get it. Down payments are popular with lenders in case of bad credit. But they’re an issue for those affected – after all, for the very same reason you are experiencing financial trouble, you can not make any big cash payments.
This is why the down payment is such a controversial topic.
It needn’t be, however. Especially when it comes to down payments, things don’t always need to be black or white. Instead, consider this:
If you hold off on buying a car for just six months and put aside 150 Pounds at the end of each month – which is a pretty regular monthly instalment for many – you can make a downpayment of just under 1,000.
Many dealers, us included, will regard this as a great sign and commitment and offer you a better interest rate in return.
Get yourself a cheaper car and always buy used
This is so obvious it’s surprising it’s still regarded as something of a secret tip.
The easiest way of getting a better deal is sticking to what you can actually afford. The road to a fair deal starts at home and by making a list of all the things you need from a car – and then finding the car which matches your requirements.
As you’ll quickly discover, these cars are typically a lot less expensive than the ones you may want, but not need. Some of them may not be very ‘cool’ or ‘sexy’. But then again, brands like Dacia have convincingly demonstrated that you can offer razor sharp prices and still sell cars that are quirky, fun and extremely reliable.
And then, by looking for this very same model on the used car market, you can save even more.
Take a look at our digital showroom to see all the great cars we have in store for you!