Very poor credit car finance has become a necessity for many consumers in the UK. For them, traditional car finance lenders like banks and credit unions are no longer an option. In the past, this condemned them to working with expensive and shady dealers. Fortunately, those years are now firmly in the past.

Today, you have more finance companies than ever offering perfectly reputable bad credit auto financing. These loans are available even to those with very low ratings at affordable prices and using realistic rates.

For you, the key to success is identifying these companies, setting up a smart strategy and steering clear of the pitfalls. In this article, we’ll explain how to do just that.

Overview/Summary [If you don’t want to read the entire article]

Bad credit car finance does not seem like a good idea. Experts regularly warn that interest rates are too high, terms too long and conditions too severe. In practise, however, there are many shades of grey.

If you are in urgent need of a car for your job, even an expensive option can be acceptable. Thankfully, you can today choose from many different options, ranging from Peer2Peer lending to more contemporary forms of buy here pay here. Probably the only thing you should really avoid are payday loans, which are simply not suited to car finance.

What’s very poor?

Before we turn our attention on the actual financing, let’s first investigate what constitutes “very poor credit”. All of the three major UK credit rating agencies use credit bands to define a very poor rating:

Equifax 0 – 279
Experian 0 – 560
TransUnion: Rating 1

If your score falls into one of these bands, you will most likely get rejected for traditional car credits. Accordingly, you’ll probably require bad credit auto financing to get a loan.

One thing you’ll need to know about these loans is that they will by default be more expensive than a regular bank loan. There is not a lot you can do about this, since the risk of a default increases the worse your credit score is – and this will be reflected in the interest rate.

What you can do is to consider the following steps:

  • Check if your credit rating is correct. If it isn’t take appropriate steps to correct any mistakes you have found.
  • Be more realistic in terms of what kind of car you want to buy. Importantly, don’t even consider a new vehicle and only look for second hand models.
  • Consider paying lower monthly instalments at the price of higher overall costs. This significantly reduces the risk of a default and increases your chances of paying off the loan in time.
  • Improve your credit rating. Important steps are rebuilding your credit score, watching your debt to income ratio and setting up a debt management plan.

So, where to actually apply for bad credit car finance?

You can probably forget about banks, as they rarely accept applicants with a very poor score and their prices are not the best. The same applies to credit unions, although they’re generally more pleasant to work with.
Peer2Peer and Fintechs, meanwhile, may be interesting alternatives for the future. But they’re just not ready to fill the hole left by the banks yet.

Which still leaves you with a few options:

  • Bad credit institutes are like banks, but offer bad credit car finance. They can be a reasonable choice. But you will need to make sure you’re working with a reputable company and that costs are not too high.
  • Family and friends are not usually the ideal source for a car loan. Without a contract, these loans are bound to cause trouble. With a contractual framework, on the other hand, they are hardly any better than a bank loan.
  • Dealership finance, finally, can yield great results. Dealers are ideal car finance lenders, since they are very interested in a deal going through. So bad credit car finance is part of their routine. Also, they are able to grant far better conditions than many bad credit institutes.

Improvements

As mentioned, these deals will as a rule be more expensive than traditional car credit. But you can improve them by …

  • … increasing the down payment,
  • … making sure to avoid penalties,
  • … going through the fineprint.

By taking a measured, strategic approach, you can even turn something as problematic as bad credit auto financing into a success.

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Rumour has it that banks don’t accept anyone with bad credit for a big loan anymore. Strictly speaking, this is not correct.

Over the years, financial institutions have learned that anyone can get into financial trouble once. They know that poor credit can be the result of simply forgetting to pay a bill, which doesn’t mean you’re unworthy of credit. And so, most banks will at least consider your credit application. Conditions might not be ideal, the interest rate might be high. But at least you have a chance.

Things change, however, as soon as you go from a bad credit score to very poor credit. Suddenly, most bank managers won’t even look you in the eye any more.

Very poor credit is still a showstopper when it comes to car finance, as thousands of car enthusiasts are finding out each year. Very few banks are willing to take a risk on you. And if they are, most of their offers are simply not affordable.

The CCC approach to poor credit car finance

At Concept Car Credit, we have made it our mission to change this. Our goal is very simply to allow as many UK drivers as possible to get behind the wheel. Obviously, we’re not a charity, so we work with a loan model and interest rates as well. But fundamentally, we don’t see why someone with a very poor credit history should not at least get a fair chance at car finance.

Our concept is surprisingly simple: First, we check whether you’re eligible for finance. Then, you can pick a car from our Manchester showroom, where we offer a wide range of cars from all the major marques and car body types. But of course, you don’t need to buy the pig in the poke. Here, on our website, you can already take a peek at our car offers, which we constantly update.

We regard ourselves as an important alternative to bad credit car loan agencies, which you can see mushrooming everywhere.

Should you really be talking to these bad credit agencies at all?

That’s an important question which we’ll try to answer in this in-depth special. Others include: Can’t you improve your credit score to get a decent deal? And, most importantly, when does bad credit turn into very poor credit?

In this special on very poor credit car finance we’ll take a look at all aspects of the topic. Afterwards, you should be able to take an informed decision and get the car credit you want.

First off, though, a little disclaimer: In this feature, we’re using the words credit score and credit rating interchangeable. This is simply a form of convention, although you should be aware of the fact that they can mean different things depending on the context. Whereas a credit score is a personal, individual score, a credit rating can also be taken to refer to a country or corporation.

Table of Contents

A lack of innovation
Avoid payday loans
How poor is very poor?
How can a very poor credit rating hurt you?
Are you sure you actually have a poor credit rating?
Can you get a good interest rate with poor credit?
Strategic Thoughts
Car Finance Option #1: Banks
Car Finance Option #2: Credit Unions
Car Finance Option #3: Bad Credit Institutes
Car Finance Option #4: Family or Friends
Car Finance Option #5: Dealership / Buy Here Pay Here
Car Finance Option #6: Peer2Peer
Car Finance Option #7: Pre-approved financing
The Future: Fintechs!

Poor credit car loan: When is it right?

You could argue that the time is never right for a poor credit car loan. After all, bad credit car financing is riddled with problems.

For one, you’re already experiencing issues meeting your current financial targets. So why add an even bigger load to that burden? And then, poor credit auto financing is usually quite a bit more expensive than a regular loan. All of this makes it seem like a very bad idea indeed.

And it goes without saying that if you still have a car, you should probably drive it until the wheels come off.

In practise, however, things are rarely this black and white.

Here are three possible scenarios when it does seem apt to apply for car finance:

  • You’re facing a crisis and desperately need a car. There can be many different reasons for this, from private problems to job related issues. Either way, you’ll recognise a crisis when you see it. And should it indeed occur, it can justify applying for a poor credit car loan.
  • If you really don’t have an alternative. Sure, for many jobs you can take public transport to get to work. In some cases, this just isn’t possible – for example, if the distance covered is very long. In such cases, you’ll have to bite the bullet.
  • We tend to regard buying a car as an expense, which it undeniably is. But sometimes, it can be an investment, too. If getting a car helps you get a new job, for example, and earn more money, then it justifies the downsides of bad credit car financing.

The ends justify the means? Perhaps. But then again, being flexible is a core requirement for success in the 21st century.

A lack of innovation?

It’s hard to say who or what’s to blame for the current car finance misery. One thing’s for sure, though: Even after many decades of consumer dissatisfaction, the car credit still hasn’t changed all that much. Says Michael Cochrum, vp of analytics and advisory services at CU Direct: “There’s nothing sexy about an auto loan. It’s essentially been the same product for 40 years.”

But is this really true?

If you’re looking purely at traditional banks and credit unions, it certainly looks that way: You find a car you like. You apply for a loan. The banks checks your financial record. You are either granted the loan or rejected. Even though the analytical tools have significantly improved, the basis for most bank decisions is still your credit report. This spells trouble for anyone with a very poor credit rating.

However, banks are no longer the yardstick

What observers like Cochrum are forgetting is that traditional bank loans only make up a small percentage of most car finance applications. In fact, for new cars, they have fallen to about 20-30% of the total credit volume, having long been overtaken by so-called PCPs.

PCPs, however, are only one among many new and, yes, quite innovative financing tools. These include:

  • HCPs
  • Peer2Peer Lending / Online Car Finance
  • Leasing 2.0 (not strictly new, but improved)
  • Buy here, Pay here (has evolved through the Internet)
  • Car Finance through various Fintechs
  • Bad Credit Institutes (again, not new per se, but business has changed thanks to the possibilities of ecommerce)

What that quote about car loans not being sexy actually means is this: For most costumers, the finance part and the selection part of the buying experience are strictly separated. In practise, this usually means that buying a car is a slow and cumbersome process.

And it surely leaves a lot to be desired.

Give everything a chance …

It is quite natural to be weary of any non-bank institutions. Banks have symbolised stability for so long that it has become hard to treat other financial companies as their equal. At the same time, by not at least considering what the modern finance world has to offer, you’re sure to lose out on some great deals.

Or, even worse, you may not get a deal at all.

Even bad credit car loans are not by default the worst thing in the world. Yes, they are not ideal and yes, they are decidedly very expensive. However, in an anything but ideal world, bad credit car loans can make the difference between not being able to get a car and getting behind the wheel again. What’s more, the industry has greatly improved and established best practise guidelines.

If the offer is good, therefore, or if you really can’t find anything else, there is no reason to say no to these companies just because of their bad reputation.

… but avoid payday loans!

The one exception to this rule are payday loans. This is not so much because payday loans are evil. They just don’t make sense when it comes to financing a vehicle.

Payday loans are not really traditional loans. They can be considered fast monetary injections that can help you bridge a financial draught. For a typical scenario, consider this: It’s the 25th of the month and you just had a water leak. There was no way to delay the repair, but now you’re broke until the end of the month.

A payday loan can help you until your next salary comes in. It is intended to allow you to buy groceries and pay for transportation to work. Payday loans should not exceed a few hundred Pounds and they should be paid back within one or two weeks. If you stick to these rules, they can be quite useful.

Not for car finance

Payday loans were, however, neither intended to be used regularly, nor for high-volume long-term investments. Financing a car with a payday loan would incur insane interest rates which no one would be able to pay back. Professional payday lenders would never fund such a project. So be wise and don’t even think about it.

Once you’ve committed yourself to buying a car, you should also be careful to avoid taking out payday loans altogether for a while. This is because “car loan lenders don’t look kindly on people who have taken out payday loans as they seem to be taking out one loan to re-pay another.” To a potential lender, it simply does not look very good if you need to borrow money each month to be able to pay your bills – even if you’re paying them back in time.

How poor is very poor?

It easy to see when a credit rating is excellent. If you’ve never even made debt and if you’ve always paid back your debt and all of your bills in time, then you’re an ideal candidate for a credit.

Defining what constitutes a poor credit rating is a bit more complex. As we’ve mentioned, a single small unpaid bill in many years is not going to hurt too much. But what if that bill had been quite big? And what if it hadn’t been just one but two – or three? And does it matter that you’ve taken steps recently to improve your situation?

International differences


When it comes to credit rating and credit scores, no two countries are exactly alike. There are quite significant differences between the UK and the USA, for example. Since many informational articles are written from an American perspective, it is quite important to understand and appreciate these differences.

Broadly speaking, the USA has a single credit rating, the so-called fico score. This is how it works:

First, major credit bureaus collect all relevant information. Then, the rating agency calculates your score using this data. Although there are different approaches to the rating process, the market is dominated by the Fair Isaac Corporation. This effectively turns the fico score into something of an official credit rating.

The UK, on the other hand, has several credit rating agencies, of which however only three truly matter on a national level: Experian, Equifax and Transunion. (Crediva is sometimes mentioned as a fourth relevant agency.) Each of them uses its own approach to generating a rating. So there are many different credit scores in circulation.

Credit rating: bands

Each credit rating established ‘bands’ which define your credit rating as either excellent, good, fair, poor or very poor. This is how the three top credit agencies define a very poor rating:

  • Equifax 0-279
  • Experian 0 – 560
  • TransUnion: Rating 1

To know your precise rating, you will have to request a score from these companies. In some cases, this will set you back a few Pounds. With Experian, meanwhile, the process is free.

How can a very poor credit rating hurt you?

We need to make an important distinction. A credit rating is not the way a potential lender sees you. In the strict meaning of the word, the rating is only awarded by the rating agency. It estimates the likelihood that your application with a lender will be successful. The actual lender will use their own system to assess how they feel about your application after going through a bit of research of his own.

In a perfect world, the two should be identical. In practise, the two numbers are close to each other, but never entirely identical. So you can get car finance even though your credit rating would suggest otherwise.

It is nonetheless useful to at least know what very poor credit scores actually mean.

TransUnion simply says that a poor score means that “you will probably find it difficult to obtain credit. If you are able to obtain credit, you may find your interest rates are higher than most people’s.”

Expanding on this slightly more, Experian defines a very poor score as follows: “You’re more likely to be rejected for most credit cards, loans and mortgages that are available.”

Broadly speaking, your credit score indicates your past ability to pay. From this, lenders will draw conclusions about your future ability to pay. This conclusion may not be perfect, but it is easy to see why it can be a useful shortcut in practise. So every problem you’ve had in the past reflects badly on your capacity to pay back your loan in time – and will thus raise suspicion or rejection.

Are you sure you actually have a poor credit rating?

Perhaps the biggest mistake is to automatically assume that you have a very poor credit rating. That said, it is easy to see why you might arrive at such a conclusion. If you’re finding it hard to make ends meet, often find yourself out of cash towards the end of the month, if you’ve missed a few payments in the past or even have a lot of debt, it would seem plausible that your credit rating would tend towards the lower numbers.

However, it is important to realise a few things about credit ratings.

For one, your rating changes constantly. Old sins are eventually forgiven and forgotten. Debt in itself is not an issue either – only failing to pay it off in time is. And your credit rating is entirely unrelated to how much money you have on the bank. (Although your potential lender will be interested in that information and may request some transparency on the issue during the negotiation phase.)

Secondly, UK rating agencies have changed their algorithms to reflect a prevalent change in perspective. Today, lenders are increasingly less interested in your financial troubles from the past. Instead, what they care about is your response to these problems: Can you work yourself out of a predicament? Can you get your credit rating back on track again? Have you taken steps to prevent similar issues from happening again?

Depending on your response to these questions, your score may be a lot better than what you expected it to be. Make sure you know where you stand. And if your rating should indeed be low, verify if it’s correct.

How can your credit rating get hurt?

So, with this in mind, what are some of the things that can cause your credit rating to take nosedive? On its website, Experian has compiled some of the most important factors:

  • Missed Payments: It’s so easy to miss a payment and so hard to get it off your rating. Even small delinquencies remain visible for seven years.
  • Charge-off: This is clearly a strong negative factor. What it means is that a lender no longer trusts you to pay back the debt you owe them and will no longer try to get it back from you. They may, however, try to sell of the debt to a collection agency. If this indeed happens, it marks another blow to your rating.
  • Settled accounts: This is a slightly better version of a charge-off, where you and the lender agree for you to pay back a smaller amount than originally envisioned. It is still a bad influence on your rating.
  • Repossession: With some loans, the lender can claim a valuable item if you fail to live up to your obligations. This potentially includes your car. A repossession shows up on your credit rating and can strongly affect it for the worse.

A bankruptcy is a worse case scenario. It is tragic in every single way. Not only will it make life extremely hard for you. It will also make it almost impossible to get a loan with anyone, not even many bad credit providers, for many years. A bankruptcy is one of the very few cases where you need to wipe the slate completely clean before you can make a fresh start.

Can you get a good interest rate with poor credit?

The short answer to this question is: No.

The longer version goes like this:

We mentioned right at the beginning of this article that even a very poor credit rating won’t mean that you can not get a loan. It will, however, definitely affect the terms of the loan quite severely.

One of the most obvious ways of how a bad rating can make car finance a lot harder are interest rates.

Interest rates are calculated based on your risk of defaulting on a loan.

What this means is: The bigger this risk, the higher the interest rate. If you’ve encountered one or many of the influences for a hurt credit score – missed payments, charge-offs, repossessions, settled accounts or collections – then your lender will naturally assume that this could happen again. Rates will rise accordingly to reflect this.

As Money Control puts it:

“Lenders employ the risk-based pricing model while giving out credit to individuals. The risk-based pricing model estimates the risk involved in lending money by calculating the probability that the consumer will default. Going by this, different borrowers will be borrowing at different costs – so different interest rates for different borrowers. (…) Going back to the question of whether it is possible to get a low-interest personal loan with a poor credit score, well, it’s not going to be possible.”

Another lesson to learn from this is that not every ‘expensive’ loan is automatically predatory. Everything depends on your current credit rating. The worse your rating, the higher the risk. And the higher the risk, the higher the rate.

An expensive loan need not be an insurmountable obstacle, though. We’ll get to that in a bit.

Strategic Thoughts



Before we turn towards all of the different options for poor credit car finance, we’d like to offer some suggestions about how to turn a poor credit score into a fair or even good one.

Admittedly, it won’t be easy. But the following concepts all have one thing in common: They are easy to implement and won’t cost you a lot of time.

This clearly makes them better than the other obvious approach: Repairing your credit score. Although almost every website on the Internet will routinely advise you to improve your rating before you apply for a loan, this is a pretty hollow suggestion.

Many of the most detrimental influences on your rating can not be offset by a few small improvements elsewhere. Just because you paid off one credit card and set up a few direct debit orders, won’t mean a bank won’t take notice of your bankruptcy last year.

Repairing your rating is important. But it will take time. If you’re serious about improving your finances, consider some of the steps we’ve outline in previous blog posts. In the short run, meanwhile, here are a few ideas that will yield results far quicker.

Don’t waste too much time on your credit report

A credit report is the basis for your credit score. It includes all relevant payment information, including all the details required to make sense of them. A credit report is a highly useful tool and far more helpful in determining your true creditworthiness than the credit score, which bundles all of this detailed information into a single number.

If you have a fair or only lightly damaged report, it makes sense to ask for your credit report from time to time to search for areas for improvement. As the report can tell you where your current problems lie, you can then attack these specifically and gradually improve your rating.

With a very poor credit score, however, these efforts won’t help you in the short run, as we’ve outlined before. So don’t waste too much time on it. Which is not to say that you shouldn’t take a look at it at all. Quite on the contrary …

Check your credit rating

Whereas improving your score takes time, checking your credit report and -rating won’t cost you more than a few minutes. And you’d be surprised how many mistakes there are in these vital documents! Some of them can be traced back to the rating agencies themselves. Most, however, are caused by faulty reporting on the side of the banks.

The Guardian describes a particularly dramatic example:

“Omar Nasser came close to losing his home when his interest-only mortgage expired earlier this year and his application for a new loan was turned down because he failed a credit check. When he investigated, he discovered that his bank, Lloyds, had registered a defaulted payment on his credit record and, as a result, his credit score – which lenders use to assess a customer’s credit worthiness – had plummeted. The default, he says, was due to a banking error because Lloyds had failed to process his request to cancel a direct debit, plunging his account into the red. “When I complained, Lloyds promised to remove the default,” he says. “But although it was removed by the credit reference firms Experian and CallCredit, it was not removed by Equifax.””

Other examples include defaults on accounts that never existed or even a person being confused with another, financially weak individual.

If you believe a mistake has been made, contact the rating agency first. If this doesn’t resolve the issue, your next contact is the Financial Services Ombudsman.

Tone down your goals

It may not be a particularly popular suggestion, but scaling down your demands is the easiest way to improve your chances of a loan. While it might seem straight-forward, some people still think it’s perfectly reasonable to try and buy an expensive sportscar despite a very poor credit rating – or that they really need a SUV to take them to work.

If you are serious about getting a car and you desperately need one for your job or other important tasks, it’s time to exercise some moderation. Make a list of all the things you need the car for. Then, find the cheapest vehicle that is capable of meeting those goals.

Another excellent point is to avoid any truly unnecessary extras. Go for the bare minimum in terms of accessories. A great suggestion is to buy the car almost ‘naked and to only add extras after some time has elapsed. This will help you determine whether you can actually afford the loan and have some money on the side.

Don’t buy new


It has sometimes been suggested (here or here) that you should rather buy a new (or ‘newer’ / ‘newish’) car than a used one if you have a bad credit rating.

This idea is not quite as crazy as it may sound at first.

The idea behind it is that you can get a better credit deal for a new car than a used car, because a new car is worth more as a collateral. If you default on the loan, the lender can repossess the vehicle and sell it on. The newer the car, the higher the price it will fetch.

The logic behind the argument, however, is ultimately flawed. New cars or even newer cars are a lot more expensive than previously owned vehicles. Even though the interest rate may be lower, the loan itself – and usually, the monthly instalments, too – is bound to be considerably higher.

Edmunds sums up the debate with a simple one-sentence conclusion:

“If your only concern is making the most sensible financial decision for acquiring the car, buy a used one, pay it off and keep it for a few years.”

Pay Less Each Month

The interesting thing about finding car finance that fits you is that sometimes, you need to pay more to be able to afford it.

Allow us to explain:

As we mentioned, the interest rate of a loan depends on the risk of you defaulting on said loan. The higher that risk, the higher the interest rate.

There is, however, another factor which decides on the cost of car finance: The time it takes you to pay back the loan. The longer the repayment period, the higher the interest rate. The logic behind this is that a longer lease actually increases the risk of a default. The more money a lender receives in the present, the safer the credit becomes.

To understand this better, think of the following hypothetical situation: A credit paid back in full at the exact moment of purchase is no longer a credit. It means you’re paying the car by cash – and the interest rate would automatically fall to 0%.

Lower monthly instalments

The longer the lease, therefore, the higher the interest rate and the more you end up paying for your car. And yet, it can still be sensible to opt for such a loan instead of trying to pay everything back as fast as possible.

That reason are the monthly instalments. After all, spreading out a credit over a longer period of time equals smaller monthly costs. Although the costs as a whole may rise, you may now suddenly be able to afford the credit, because it is tailored to your income situation.

Of course, you should not let things get out of hand. As soon as the overall interest rate rises to absurd levels, it is time to hit the breaks. This is why it makes sense to define a limit for yourself and commit to strictly sticking to it.

Other than that, however, extending the repayment period of your car finance can be a viable tool to get car finance despite a very poor credit rating.

What about a co-signer?

The one thing that makes car financing for poor credit ratings so problematic is the question of risk. Banks – and credit unions, too, albeit to a slightly smaller degree – detest risk and would ideally only lend out to customers with perfect credit scores, a steady income and plenty of collateral.

That will never be possible, of course. But at least you can take a few steps towards meeting them halfway.

Asking someone to co-sign the loan with you is one of those steps. If you can find someone with a better credit history than yourself, then this significantly reduces the dangers from the bank’s perspective. Effectively, there are now two parties taking responsibility for the same amount of money. And there are also more options for recourse should things go sour.

The problem for you is finding someone willing to do this for you. If you want to do this right, you should not use your financial partner to support you monetarily, but merely to help you get the loan approved. Unfortunately, that’s not how most people treat this subject. That’s one reason why good co-signers are hard to come by and all too many friendships have broken apart over a car loan gone bad.

So before you start asking around, be sure you can meet your obligations.

Let’s now turn towards the different car finance options at your disposal and check for their pros and cons!

Car Finance Option #1: Banks

A bank is still a perfectly reasonable place to apply for a loan. This is all the more true since banks are actually behind most of what is misleadingly called ‘dealer finance’ as well.

How it works: You apply for a loan and are accepted or rejected on the basis of a few factors. These include your credit rating, your savings, income and the height of the credit.

Factors for Success: Your credit rating will usually need to be fair at the very least, probably better. A stable source of income is important, too. Problems in one area can be offset by throwing some items into the negotiations which can be repossessed by the bank.

Poor Credit Car Finance Considerations:

Banks rarely do business with people with a poor credit rating. They are not your first choice.

Pros:

  • Costs can be decent
  • Banks can finance the full purchasing price of a car
  • An easy to understand and well known application process
  • Since there are plenty of banks in each town, it is easy to ‘shop around’

Cons:

  • Rarely your best offer
  • Chances for success with poor credit are slim
  • You need to negotiate the car deal and the loan separately

Car Finance Option #2: Credit Unions

Credit Unions are essentially banks. The main difference is that credit unions are set up by a group of ‘members’ who can determine different goals than purely profit maximisation. This means that their terms and conditions may be more friendly for applicants with a less than perfect credit rating.

How it works: Just like a bank loan.

Factors for success: Credit Unions use the same decision criteria as banks. But they may be more lenient or flexible in applying them. As The Simple Dollar puts it: “The loan process isn’t a “check off the box” interview like it would be at the Big First Global Bank; it’s a conversation.”

A lower credit score may be enough to get accepted, for example. Interest rates may be lower, allowing you to more easily afford a loan.

Poor Credit Car Finance Considerations:

Generally speaking, credit unions are a better choice when it comes to car finance. However, you need to be a member to be able to get credit with them. So the costs of membership need to be lower than the costs of a cheaper loan. Also, Credit Unions are ‘specific’ and won’t just accept anyone. So you’ll need to investigate whether or not there’s a credit union that’s right for you.

Pros:

  • Usually cheaper rates than a bank
  • A more understanding attitude towards poor credit ratings
  • Credit unions can finance the full purchasing price of a car
  • An easy to understand and well known application process

Cons:

  • You need to be a member
  • Chances for success with poor credit are better, but still slim
  • You need to negotiate both a car deal and the loan separately

Car Finance Option #3: Bad Credit Institutes

Bad credit companies enjoy a pretty bad reputation. That’s probably fair, since the industry definitely had its dark periods. Since the 90s, however, it has evolved and has established far more professional offers. Today, a bad credit looks deceptively like a bank loan, only tailored towards those with financial problems.

How it works: Essentially like a bank loan. One of the typical differences is that many bad credit companies won’t check your credit rating or at the least not base their entire decision on it.

Factors for Success: The only factor is whether or not you can pay back the loan. Bad credit institutes are more willing to expand the loan time to meet your needs than banks and they are willing to take more risks, too. All of this means your chances of getting accepted are higher.

Poor Credit Car Finance Considerations:

For these companies, applicants with a poor credit rating are not a nuisance or the exception, but their bread and butter. This means your proposal will fall on far more sympathetic ears. However, your terms and conditions may actually be more severe than with a bank.

Pros:

  • Far higher chances of success
  • Credit rating is just one element among many
  • The industry has improved and is a lot more respectable than it used to be

Cons

  • Expensive
  • Terms and conditions may be very severe and strict.
  • There are still plenty of black sheep

Car Finance Option #4: Family or Friends



This option is rarely mentioned when discussing poor credit car finance. This is somewhat surprising, since it seems like such a natural thing to do: if you can’t get a loan with a bank or credit union, why not simply ask friends of relatives for a little financial support?

Factors for Success: Experiences are mixed. It is often unpleasant to ask friends or family for a loan, just like it is unpleasant for them to decide whether or not to say yes. They may have reservations, and quite rightly so, since a default would not just spell financial trouble, but can also ruin a friendship.

Moneycrashers has a list of ten entirely convincing reasons for not lending to friends and family. The most important of these is that a family loan is an open ended loan, which means that there is no definitive timeline for repayments. This is part of the reason why these loans are excellent for borrowers, of course. But this can obviously spell trouble if the borrower fails to pay back the money within a reasonable timeframe.

This paints a very bleak picture. In reality, things are not quite as negative. “In many cases, family loans are successful – but success requires a lot of open conversation and planning,” The Balance write, which sounds about right.

Poor Credit Car Finance Considerations:

Family loans may seem perfect if your rating is low. After all, you can potentially agree to keep the interest rate very low and be more lenient when it comes to missed payments. However, some form of documentation is important. Luke Landes of Consumerism Commentary recommends to always at least draft a rough framework for the loan in case things go wrong.

There are apps like Prosper to ensure everything goes according to plan, but Landes advises not to bother with them:

“It’s an unnecessary step — and an unnecessary expense. Prosper will take a percentage out of each payment. There’s no need to get a third party involved. If the lender wants to set it up, you can still agree to the loan, but as a borrower, I wouldn’t suggest bringing up the topic.”

Pros:

  • Low costs and more flexibility
  • Even a very poor credit rating need not be an issue

Cons:

  • If things go wrong, it can destroy personal relationships
  • Contractual regulation is still required
  • It is never assured whether a relative can finance the entire sum

Car Finance Option #5: Dealership Finance / Buy Here Pay Here

Dealerships have offered car finance since the earliest days of the industry. For the most part, it hasn’t done their reputation a lot of good. Since car dealers also trade in your old vehicle and sell you a new one, they have plenty of possibilities to shift costs from one to the other. This creates a big potential for manipulation. However, most dealers have significantly stepped up their game. Today, they are frequently the cheapest source for car credit and can offer you incredibly useful all in one packages.

How it works: After you’ve selected a car, the dealer offers you a credit tailor-made for that precise vehicle. What happens behind the curtain is that they will apply for a loan with different banks. Although they will not necessarily opt for the offer that’s best for you (because it may not be best for them) and although they will naturally reserve a margin for themselves, these loans can nonetheless be excitingly cheap.

Poor Credit Car Finance Considerations:

Dealers are extremely eager to sell you more than just a car. They also understand about the problems of those with a poor credit rating. This is why car finance with a dealer is often a very simple and agreeable process. As long as you’re working with a reputable dealership, that is.

Pros:

  • Often excellent conditions
  • Convenient all in one solutions
  • Fast application procedure

Cons:

  • There are still black sheep
  • Prices can vary considerably, which means you may have to apply for several loans
  • Loans tied to a specific car and trade-in

Car Finance Option #6: Peer2Peer

The Internet has definitely had an impact on the car industry, although it has not yet entirely revolutionised it. Peer2Peer car financing may change that. It is the most powerful of a slew of recent financial innovations that should make it easier for more people to get access to cars again. The Peer2Peer industry has already announced it wants to target car buyers more in the future. So it shouldn’t be long before it breaks through into the mainstream.

How it works: Essentially, peer2peer financing is a collaborative process. Rather than the money coming from a single person (‘lender’), it can now come from many different individuals (a ‘consortium’ or financing group). You apply for these loans online through specialised websites, where you briefly present your plans and then wait for offers to come in.

Poor Credit Car Finance Considerations:

The main reason people lend money on these sites is precisely because they want to make a larger profit than can be had with safe methods like putting their money on the bank. This is why car finance for poor credit ratings seems ideal for the format. Also, there is a lot more flexibility when it comes to the conditions of the loan, which can potentially be longer than a regular bank loan. Peer2Peer loans are not secured, which means you need not fear repossessions in case something goes wrong.

You should consider, however, that this comes at a cost: Most peer2peer loans are more expensive than their traditional counterparts. They also require quite a bit of understanding of the economy 2.0 to succeed.

Pros:

  • Excellent chances for those with a poor credit rating
  • Flexible terms and conditions, also with regard to monthly payment
  • Unsecured loans

Cons:

  • Requires a feeling for the digital marketplace
  • Interest rates are higher than with more traditional loans

Car Finance Option #7: Pre-approved financing

Pre-approval can simply mean applying for a loan at a bank before heading out to the dealership. But it can be something different, too. Pre-approved loans are a form of financing which reverses the usual order of the car buying process. Rather than selecting a car first and applying for a loan later, you apply for a loan first and then chose the car you can afford.

How it works: Pre-approved financing in relation to car loans is usually offered by companies which combine in-house financing with a car dealership. Very often, these deals are aimed specifically at car buyers with a bad credit history. Almost without fail, you can only buy a pre-owned car with this type of car loan. Other than that, the concept is identical to a bank loan: You first apply for financing. If successful, you can then enter the showroom and select a car that you like.

Poor Credit Car Finance Considerations:

As a form of bad credit car loan, pre-approved financing is ideal for those with less-than-perfect credit. Usually, the monthly payment is affordable, while interest rates are high. This is great in theory. But make sure you are not obligated to buy a car after securing the financing. Showrooms of these companies can be disappointing and you want to avoid having to buy the pig in the poke.

Pros:

  • Avoids disappointments in the financing stage
  • Car selection process becomes more agreeable
  • Designed specifically for those with a less-than-perfect credit

Cons:

  • You can only buy a pre owned car
  • Expensive
  • Selection of vehicles may be very limited

The Future: Fintechs!



Peer2peer financing is only the first step on the road to entirely new financial car finance models. A new generation of fintechs is stepping into the arena to shake up established markets and offer something fresh and new to the equation.

Forbes has listed some of the most promising of these start-ups. To sum up their findings, these are some of the developments you can expect over the new years:

  • Cars on a subscription model. This is similar to car pooling, since it is based on the idea that you pay a monthly sum and can then pick a car from the provider’s pool anyplace anywhere. The difference is that this time, you actually rent cars from a variety of participating dealers. This means the days of struggling to find a rentable car in the proximity of your house are over.
  • Used car leasing: It is about time that used car leasing made the leap from a great idea to a reality. The used car market is teaming with energy. The popularity of PCPs has flooded it with countless vehicles that are only three to four year young and in fantastic shape. Used car leasing would fuse the advantages of leasing and used cars.
  • New finance providers are offering customers to wipe the slate clean and build up a new credit history with them. They can start at 0 and then gradually build up a positive reputation. This way, you can work your way up to a car finance deal pretty quickly.

At the same time, dealerships and specialised banks are responding to the competition by taking their offerings to the web and improving them. To some, this variety of different services may seem confusing. For anyone with a poor credit rating, meanwhile, it can only come as great news.

How to improve your credit score I: General strategy

Finding car finance for poor credit ratings is one way to deal with a bad score. Improving your score is the other.

There are numerous ways to improve your credit score. We’ve written about this extensively on our blog. Ultimately, every strategy needs to follow four core principles:

  • Avoid getting even deeper into debt. Ideally, you should generate a small surplus at the end of the month.
  • Use the surplus to start building reserves. These will help you as a safety net for bad times, as a support when applying for poor credit car loans and to pay for parts of the car financing in cash.
  • Start rebuilding your credit score from the ground up. Foremost, this means: Never missing a single payment again.
  • Also, pay off and eliminate your existing credit cards. Instead, you should use a credit building credit card to pay for all your purchases. This allows you to demonstrate that you can handle money better now and should gradually send your credit score North again.

How to improve your credit score II: Watch your DTI

When it comes to improving your credit rating, everyone seems to have an opinion. Unfortunately, all too often, these are just that: Subjective points of view. And very rarely will these recommendations actually have a positive impact on your score.

What’s more, most suggestions are quite vague and offer very little in terms of practical steps. Which is why we wanted to introduce a concept that may not be all that well known but plays a vital role in the decision making process of many lenders: The DTI.

What’s the DTI?

DTI stands for Debt to Income and it denotes the ratio of your obligations to your resources. If your debt far exceeds your income for a short while, you may be able to compensate for this with savings and the occasional payday loan. Once it turns into a long-term thing, meanwhile, you’re in trouble.

A negative DTI will deplete your savings, reduce your financial leeway and virtually destroy your chances of any kind of finance. With a badly damaged DTI, even bad credit car financing can become difficult, as it’s just too big of a risk.

This is why you should aim to improve your DTI at all cost.

You can either do this by raising your income or by reducing your expenses and your debt. It may not always be easy. But the big advantage is that if you can pull it off, you’ll see results very soon.

How to improve your credit score III: Debt Management Plan

Sometimes, even the best intentions can not save you. If you can’t find car finance for poor credit ratings and feel like you desperately need to get behind the wheel again, a debt management plan may be your best option.

On the face of it, a debt management plan is nothing spectacular. It is a formal agreement between you and your creditors to re-arrange your loan repayment schedule. You admit that the current plan isn’t working and that changes are required for you to pay back your debt in full. It stipulates new payment goals, sets up a timeline and monthly payments, which will be somewhat lower than your current ones.

Not all kinds of debt can be handled through a debt management plan. But quite a lot of it can. If you’re having problems even applying for poor credit auto financing, a DMP may be just what you’ve been waiting for.

Poor Credit Auto Financing: What to take into consideration

Now we’ve discussed the many different lenders you can turn to, let’s talk about details. There are, after all, quite a lot of smaller points you should take into consideration. They may not seem all that important. But they can turn out to be essential when push comes to shove.

The following recommendations are form an interesting article on bad credit car dealerships by online website Credit Donkey. These are by no means trivial, so if you’re interested, do head over to their website for the full feature.

Increase the down payment

It may seem absurd to even talk about increasing the deposit when you need to resort to bad credit car financing. If you had that kind of money, you’d simply go and buy the car with cash, wouldn’t you?

Yes and no.

Of course, you’ll find it hard to put down any amount of cash with a bad credit rating. Then again, by now you should have reduced your DTI and made sure that your income exceeds your expenses. If you can manage that, then you can save some money, put it aside and gradually create a meaningful down payment.

It’s not even about huge amounts here. Rather, it’s about making a gesture and indicating that you’re not entirely without means. A few hundred Pounds can be quite helpful, so start creating the conditions to make that happen.

Ask about potential penalties

As you’d expect, poor credit car loans work a little different than a regular personal loan. Specifically, they may have more severe regulations when it comes to missing payments.

This can mean that lenders can pull the plug earlier than with a bank loan. In a worst case scenario, this would spell insolvency. Also, lenders may be able to either raise the rate or impose a penalty payment on you if you fail to meet the arrangement specified in the contract.

Read your contract carefully to know what you are getting yourself into. If the penalties seem too severe, consider walking away from the deal.

Ask if the dealer requires credit insurance

This is not something you’ll find everyday, but we thought we’d mention it. Sometimes, dealers will include a clause about credit insurance in their contract. Credit insurance is basically an agreement that protects the lender from you defaulting on the loan. It can be quite useful, but it is also expensive. Effectively, you’d be paying a monthly sum towards the insurance on top of your loan payments. If you do find yourself unable to pay your monthly contribution, the insurance kicks in and then protects both you and the dealer.

The thing is that insurances are very expensive and can thus turn into a self-fulfilling prophecy. Or, to put it differently: You may need the insurance only if you actually have to pay for it.

It seems wiser to avoid a mandatory credit insurance clause and instead work towards a more sustainable financial situation for yourself. This is not Utopian thinking, you can already find many ideas just by browsing our blog. And if you do believe it’s impossible, then perhaps you really shouldn’t be looking for car finance in the first place.

Read all of the paperwork

We can’t stress this enough. A contract is a legally binding document. When it comes to a poor credit car loan, it can affect your finances for years to come. So naturally, you’ll want to read it through and make sure you fully understand what it says.

Strangely, this is not what most people looking for bad credit car financing do. Often, they’ll simply be too happy they were able to find any loan at all. Or they’ll be afraid that by requiring more time, they’ll loose the opportunity.

This is not the way we’d want things to be. Do take your time to read all the paperwork and to mull things over in your mind. If you find out you can’t meat the obligations, then no one stands to benefit from such an arrangement.

Can’t get car finance? What about a direct lender?

One of the more recent developments in car finance has been the move towards direct lenders. The rationale behind this seems straight-forward: Buying a car is expensive enough. Why pay for a middleman and make things even more expensive?

Let’s take a closer look at the concept to understand the basics of it.

Direct lending is a pleasantly simple concept. A direct lender is a medium-sized company extending credit directly to you, the borrower. They are not banks and as such do not fall under specific legal limitations and regulations. They are also not as big as banks. Meaning: They can not provide the kind of vast loans that multinational mega-corporations could.

For something like a car loan, however, they seem perfect.

Direct lending: Usually not for private loans

The curious thing, then, is that this is not how things have panned out. Very few direct lenders offer bad credit car loans. Instead, they specialise in business loans, and tend to favour loans above 5 Million only.

This is hardly of interest for the average car buyer in the UK.

Nonetheless, many companies these days use the word direct lender to describe that they are offering bad credit car loans with different acceptance criteria from traditional banks. Often, they will be a lot more lenient and take on applicants who would never stand a chance with a conventional private loan.

Is a direct lender the solution?

Certainly, direct lenders have spiced up the market for bad credit car loans. They have effectively demonstrated that you can lend money to the unemployed, bankrupt and financially weak and still build a healthy business around it. This should be an eye opener for all those in the industry who would rather not lend at all than extending credit to these groups.

That said, the benefit of a direct lender – less regulation, less strict rules – also makes them problematic. Essentially, these companies will be happy to take you on as a customer, but then also treat you a lot more severely if you should fail to pay them back in full. This makes working with them quite risky.

At the same time, if you can get a great deal and you have thought things through, a direct lender may be just what you were looking for. Bad credit car loans don’t need to be a problem. Instead you can regard them as an opportunity. Just remember to read all the paperwork and never sign anything you don’t really understand.