Financing a car with poor credit, made easy!
Are you replacing your tired, battered old motor? Has yours given up the ghost? Is it no longer acceptable to use your family and friends as your own private taxi service, and you’re on the lookout for your own first car?
Or maybe you want a new car for the simple reason that you just want something a bit smarter to drive around town in. If so, the time has undoubtedly come to go out in search of a new car.
Pretty much all of us need a vehicle to get around in, especially if you live in a more rural area with poor bus or train links. And even if you do live in a town or city, a car can still be essential for everything from commuting to work to doing the school run, visiting friends and family to going on holiday – our cars give us freedom.
So with all this in mind, it can be a stressful business when you’re trying to buy a car but have less than perfect credit. To make the process a bit easier, we’ve put together a few tips and recommendations on what to consider before signing on the dotted line and buying a car.
Do the maths
First things first, how much have you got to spend on buying your soon-to-be new car? It’s all about the budget you see. Something a bit fast and saucy would be lovely, but it’s hard to stress enough how important it is to stick within the price range of what you can afford. The key is to set a maximum price and stick to it.
This might sound like a case of stating the obvious, but choosing a car to buy is as much an emotional decision as a hard-nosed logical one. Unless you’re committed to a maximum price, any thoughts of being cost-conscious will go straight out of the window when you set eyes on the most beautiful car you’ve ever seen… which also happens to be £1,000 beyond your price range.
Oh, and never accept the salesperson’s offer to get into the driver’s seat until you’ve already decided that you’re going to buy – there’s no quicker way to get emotionally attached to a car that’s completely unaffordable.
But what if you don’t have any spare cash – where do you start on setting a budget? Then you need to understand what car finance options are available to you as you’ll need to borrow the money. And then you’ll need to work out what you can afford to pay back each month. There are plenty of car loans out there, but to find out which one is right for you, you’ll first need to know your credit rating.
Check your credit rating
Check the health of your credit profile by looking at your credit file – this can be done online with any of the main credit scoring agencies, like Equifax, Callcredit or Experian. There are free options too – check out Noddle and Clearscore.
If you’ve missed repayments on your credit card, mobile phone bill, or any loans you’ve had in the past, or worse still have any defaults or CCJ’s to your name, you’ll know already that you’ll have poor credit. However this doesn’t mean you shouldn’t check your credit score before you go out to find credit to pay for your soon-to-be car. By looking at your credit report beforehand, you should be able to get an idea of how ‘bad’ your credit is by looking at the score you’re given – you may find your credit rating is better than you thought.
Only people with a very low credit score and a recent history of defaults and CCJ’s are likely to struggle for access to loans or can finance. And even then this isn’t necessarily a hindrance to getting a car – as a quick glance at Autotrader will show, you can pick up a car for as little as £500. Not a small amount of money by any means, but a low enough price to be within reach after a few months of saving. If you need a car sooner than that, however, there are still a number of options available to you.
What are my credit options?
There are a number of credit options available for aspiring car buyers who are hindered by poor credit.
If you’re buying a car from a dealership, they may be able to offer you a car finance package, such as a PCP (Personal Contract Purchase), HP (Hire Purchase) agreement, or one of a number of other car finance options. It’s worth bearing in mind that interest rates on these can be toward the higher end of the spectrum if you have poor credit, and that you wouldn’t technically own the vehicle until the end of the agreement after you’ve fully repaid what you owe.
Here’s a quick look at the most common car finance packages you’re likely to be offered by a car dealership:
Hire Purchase Agreement
A hire purchase package is a simple and easy form of finance which is very similar to a personal loan. You will be asked to pay a deposit – typically 10% of the value of the car upwards – and you will then be contracted to pay the remainder of the amount in monthly instalments.
While they tend to offer greater consumer protection than a personal loan, you’ll likely be charged higher interest rates if you have poor credit. Also, another key disadvantage of Hire Purchase Agreements are that until you have made your final repayment, the car doesn’t belong to you – in effect you are leasing the car from the supplier of your hire purchase provider, until you’ve fully paid off your balance.
Personal Contract Plan (PCP)
A PCP contract is a bit like leasing the car with the option to buy at the end, in that you will be expected to pay a deposit equal to at least 10% of the value of the car and then make a number of monthly repayments until the end of your contract. However you will be asked to defer a lump sum final payment – often a third of the value of the car – which is to be paid off at the end of the contract, otherwise known as the ‘minimum guaranteed future value’.
When the PCP contract expires, you’ll be given the option to either pay the deferred sum of money and keep the car, sell the car privately to fund the final payment, or hand the car back to the dealership – so be careful not to damage the car if you intend to return it!
This is exactly as it says on the tin. Leasing is ideal for people who want to get a new car every so often, minus the fuss of actually owning it outright. After choosing what car you want, your anticipated annual mileage, and how long you want it for, you will then be expected to make monthly payments over a contracted period.
A deposit of sorts will be expected in the form of a few months’ rent up front, and you will also be expected to take out an extensive insurance package to protect against damage to the vehicle.
If you happen to have a bit of money set aside to put towards your car purchase, you could opt for a 0% finance package. This type of car finance will require you to put forward a large deposit – often in the region of around 40% of the value of the car – and in return you will be able to pay the remainder of the bill in monthly instalments, interest free of course.
It is worth mentioning that you will not be able to get this kind of car finance on all cars, and that monthly repayments will be higher because loan terms tend to be shorter.
Getting a loan
However you don’t necessarily have to apply for credit with a car dealership – there’s always the option to use other sources too, like a loan. For many, getting a loan to buy a car is the preferred method because, unlike with car finance packages, your car will belong to you from the moment you’re at the wheel.
Granted, a high street bank is unlikely to lend to you if you have poor credit, and payday loans and logbook loans, which are secured against the value of your car, should arguably be avoided because they are notoriously high-interest forms of credit. Guarantor loans, on the other hand, might be a more viable option, seeing as they are more affordable and flexible than many other borrowing options out there.
A guarantor loan, which requires you to find a loan guarantor to back-up your application, is a common go-to borrowing option for aspiring car buyers who are affected by bad credit – tens of thousands of car buyers in Britain turn to guarantor lending in Britain every year. You’d be forgiven for questioning our intentions on this, seeing as we are affiliated with guarantor lender, UK Credit, but see for yourself – they are a useful car buying credit option.
Do your homework – go online and get advice from the experts
While this short guide will come in handy, don’t forget that the internet is your friend. There are countless in-depth guides about the finer details of car buying, and what to consider online – you could do worse than take a few hours to find out what the experts advice on sites like WhatCar.com and Which? Consumer knowledge is power, after all.
Best of luck!
Your wedding doesn’t have to cost the earth
We look back at a few blockbuster classics and their budgets from years gone by.
What hidden costs are involved when buying a house?
Make sure you get the best credit deals by increasing your credit score