How to secure car finance with bad credit

Looking for low monthly payments, but have a poor credit score? You need bad credit car finance. Keep reading to understand all your options

BuyaCar team
Jan 31, 2021

Looking for affordable car finance can feel like an impossible feat when you have a bad credit score. The advertised interest rates and some incentives suddenly disappear when credit checks are carried out, so the cost of borrowing can rise sharply - meaning that the car you're after may suddenly seem out of reach.

This is typically down to credit ratings, which are based upon your situation and financial history. Lenders assume that the lower the score, the higher the likelihood of you missing payments, so they raise the interest rate and take away options such as no-deposit finance in an attempt to recoup their money as quickly as possible.

As a result, having a bad credit score usually results in you facing higher finance costs. Keep reading to find out more and click the links to understand how to maximise your chances of getting car finance with a bad credit score, along with ways of making finance costs more affordable, and how to improve your credit score. Meanwhile, if you're looking to get a car lease, read about car leasing with bad credit here.


Car finance options with bad credit

The most popular types of finance - PCP finance and Hire Purchase - are often available to customers with lower credit scores, for both new and used cars.

If you’re applying with bad credit, though, then you’ll typically find that interest rates are higher than in the representative examples provided, which reflect the rate offered to most customers. A deposit is also likely to be needed. As this goes towards paying off the finance, however, placing a deposit does give you the benefit of reduced monthly payments.

This makes it all the more important to compare quotes. Some retailers, such as BuyaCar, work with a panel of lenders to improve your chances of getting a competitive offer, as even if several finance companies won't lend to you, there will often be one or two that will. Check out the best bad credit finance offers available now.

Personal Contract Purchase (PCP) finance

PCP finance has been the most popular form of finance for many years, because it offers low monthly payments compared with a car loan and flexibility at the end of the contract - if you want to buy the car you can make the large optional final payment and it's yours, but if you don't want to keep it, you can simply hand it back and walk away or finance a new one.

Monthly payments only cover the difference between the initial cash price and the car's predicted value at the end of the contract - with any deposit you make shrinking the monthly payments - and interest added on top. This enables you to simply return the car at the end and walk away with nothing left to pay (provided you stick to the pre-agreed mileage limit and keep the car in good condition).

Alternatively, if you've fallen in love with the car, you can buy it at this stage by making the optional final payment - also known as the balloon payment - which you can do with a lump sum payment or by refinancing the balance and continuing to make monthly payments.

In some cases, the car may be worth more than the optional final payment - with the difference referred to as equity. If that's the case, you can effectively trade the car in for a new one and put this extra value towards the deposit on your next car, reducing your future monthly payments.

More details about PCP finance

Hire Purchase (HP) finance

While PCP is popular because it offers low monthly payments, Hire Purchase is likely to cost you less overall if you want to own the car at the end of the contract. That's because you pay off the balance quicker, so there's less interest to cover.

As a result, Hire Purchase makes more sense if you’re looking to run the vehicle for several years and want to own it outright, because you should end up paying less interest overall. As there is no large optional final payment - as with PCP finance - the monthly instalments are a little higher.

However, as the monthly payments cover the full cost of the car, you’ll automatically own it once the last monthly instalment has been made, without having to find the cash to make the large optional final payment needed with PCP - which is often up to around half of the car's initial value - or needing to refinance this amount.

More details about Hire Purchase

You may also want to look into the cost of a bank loan, though if you have a poor credit score, you can expect to pay higher interest rates. As you own the car from day one with a bank loan, though, you are free to sell the car at any time - if, for instance you can no longer afford it, or your situation changed and you need a larger car, for instance.

Leasing is generally not available to drivers with a bad credit rating, so if you have a less-than-perfect credit score and want the lowest monthly payments, PCP finance is likely to be a more realistic option.

Bad credit car finance with no deposit

It’s unlikely that no-deposit finance deals will be offered to drivers with a poor credit score. That's because providing car finance with no deposit is a larger risk for lenders, as it means lending all the money to cover the full cost of a car - which loses value as soon as you drive it away.

This increases the chances that a lender would lose money if you missed payments in the first year or two. Even if the company had to seize the car to sell it, the proceeds - plus any payments that were made - may not cover the full value of the finance, leaving the finance company out of pocket.

As a result, no-deposit finance is generally restricted to drivers with a good credit score. On the other hand, if you do have a reasonable amount of cash to hand, putting down a larger deposit could help you to secure car finance, as the larger the deposit is, the less risk you pose to the lender.


Cheap car finance with bad credit

Keep reading for tips on how to improve your credit score below. Even if you’ve tried everything and still have a relatively low rating, though, there are other ways of reducing the cost of car finance.

Don't just look at the monthly payments when working out whether a finance deal is good value. When comparing car finance costs you need to make sure you're comparing like-for-like - the same type of finance, with the same deposit, contract length and mileage allowance. Do this and then you can be confident that the car with the lowest monthly payment should cost you the least.

Meanwhile, if you're looking to own the car at the end of the contract, you'll want to look at the 'total amount payable' figure (quoted with PCP finance and Hire Purchase). This figure includes all the interest charges and fees, and will clearly show you the cost of taking different types of contract, such as a longer or shorter agreements, for instance. If there is a deposit contribution discount, however, make sure you check whether this is included in the total amount payable, as this is paid by the finance provider.

As a longer repayment term means interest builds up over a greater period, you can expect a higher total amount payable with a five-year contract (assuming the same type of finance, deposit amount and interest rate) compared to a three-year equivalent, for instance.

To find the right deal for you, focus on the following elements.

  • Choose a car that holds its value well
    Monthly payments for PCP finance are based upon the difference between the price of a car at the start of the contract and its expected value at the end. So a car that retains its value well and depreciates little will often cost less per month than one that might have a lower cash price but loses value quickly. If in doubt, get like-for-like finance quotes, with the same deposit, contract length and mileage allowance and you'll see which options offer the best value.
  • Adjust the deposit
    If you have the money available, increasing the size of the deposit will reduce your monthly payments, as well as the amount of interest that you pay (because you’re borrowing less money). Higher deposits can also make you eligible for a lower interest rate in some cases, as the more you put down upfront, the less risk you pose to the lender.
  • Extend the agreement
    If you’re really struggling to find an affordable car for a three-year finance term, then most finance agreements can be extended to four or five years, which usually reduces the monthly payments, as you’re spreading the cost over a longer period. This does come with a huge warning, though: you’ll be borrowing money over a longer period, which can substantially increase the total you have to pay in interest - particularly if you choose a finance scheme with a high interest rate. Some drivers use PCP finance to effectively rent a car, returning it at the end and then choosing another car on a new PCP agreement. In this case, you’ll generally spend less per month by keeping the same car for longer periods, although if you want the lowest overall cost with Hire Purchase or PCP, the shorter the contract, the less you'll pay overall, as less interest mounts up.
  • Choose a cheaper car
    It may seem obvious, but if you choose pricier cars rather than more affordable models this will typically cost you more. Consider a couple of different models, however, and you could find one that suits your needs but comes with lower finance costs. This could help you to get a newer model, or a higher specification within budget. For example, you might have your heart set on an Audi A1, which just about fits into your budget, but you could easily cut your monthly payments by £40 by getting a similarly-sized Ford Fiesta of the same age. This might enable you to get a car with more kit or a better engine, for instance or allow you to pay the finance off quicker, reducing your interest charges and making you the legal owner sooner, if that's what you're aiming to do.


Car finance for young drivers with bad credit

Not everyone with a poor credit score has been in financial difficulties, particularly if they are young. Teenage drivers, or those in their early 20s, can find themselves with a low credit score through no fault of their own. If you're a young driver considering finance, read our guide to car finance for young drivers for more information.

Those who have never taken out a credit card, loan or finance previously, typically won’t have been able to show lenders that they can make payments on time - and as a result, won't have been able to build a strong credit score.

And if you've frequently changed addresses and had no regular employment until recently - not uncommon if you’ve just left education - then your credit score may be weak. If this applies to you, check out our guide to how to build up your credit score.

If you have time before you need a new car, following those tips should give you the best chance of being approved next time around. If you need a car more immediately, however, and you don't have a history of missed payments, guarantor car finance can provide a solution.

With guarantor finance, you’ll need a friend or family member with a strong credit rating who will step in as the guarantor to make your payments if you fail to do so. This often results in a lower interest rate, as the quote takes into account the credit score of the guarantor. You’ll also be able to increase your own credit score as you make payments on time. Just be aware that you can damage your guarantor's credit rating if you miss payments and then they fail to make payments for you.


Improve your credit score for car finance

Lenders rate customers with a strong credit history, who are in a stable situation, as the lowest risk. These are the people who are typically eligible for the lowest interest rates.

So you can ensure that you’re presenting the best possible case to the lender, make sure you register on the electoral roll. Living at the same address for several years and having a permanent job also boosts your creditworthiness, although freelancers who can show a regular income stream should also be rated highly.

If you haven’t taken out credit before, then lenders won’t have any evidence that you make repayments on time. Taking out a credit card and using it - even for just a few purchases - then paying your bill in full each month, should go some way to building a credit score.

However, you should avoid making several finance or loan applications in quick succession, particularly if you don’t meet the criteria and are likely to be rejected: these can have a negative impact on your score. Factors such as County Court Judgements and several missed payments on previous finance contracts will impact your credit score for several years, requiring you to rebuild your credit score, too.

For all the information on how to boost your odds, read our guide to maximising your chances of being approved for car finance.

*Representative PCP finance - Ford Fiesta:

48 monthly payments of £192
Deposit: £0
Mileage limit: 8,000 per year
Optional final payment to buy car: £2,923
Total amount payable to buy car: £11,926
Total cost of credit: £2,426
Amount borrowed: £9,500
APR: 9.9%

BuyaCar is a credit broker, not a lender. Our rates start from 6.9% APR. The rate you are offered will depend on your individual circumstances.

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