How to Get a Car Loan When You Have Bad Credit
I’ve got bad credit. How can I secure a car loan?
It can be tricky to obtain a car loan if you are unfortunate enough to have bad credit. There are bad credit car loans out there, but you do need to carry out a bit of research and consider all available options.
When you apply for any type of loan, and a car loan is no exception, the lender will conduct a credit check just to see whether or not you are considered a risk. If you’ve got a low credit score you might find it really difficult to secure a car loan. But there are some things you can do to help alleviate the situation.
So, what’s my credit score and how do I check it?
You really must manage your credit score. Your ranking is dependent on a number of factors. Perhaps you have missed some payments on past debts, you might even have filed for bankruptcy, or maybe you’ve fallen into arrears with your monthly utility bills?
You won’t be able to repair and hike up your credit score if you don’t actually know what it is. You may have a rough idea, but it makes sense to obtain a copy of your personal credit report before you go down the route of trying to get a bad credit car loan. The report will give you all the details about any payments, outstanding debts, loans or other types of account that you could even have forgotten about.
Improve your credit score and you’re on the way to improving your chances of obtaining a car loan
Get a copy of your credit report and then you can begin to sort out the issue. Most credit referencing agencies, e.g. Equifax, Experian or TransUnion, will give you’re your credit score for free. If you discover any faults on your report, you can take measures to have them changed. The Federal Trade Commission can give you all the information you need to correct your credit report. The agency may request additional documentation. If they agree that there is an error, they will get the ball rolling and investigate the situation for you.
This process can take some time. But you have at least made inroads into getting the situation sorted out. Sometimes a creditor or account is not willing to remedy the report entry. If this is the case, the reporting agency can attach a note to your credit report explaining that you do not agree with the respective entry. The respective lender then knows the situation and may accept your lower scoring. So you could obtain a bad credit car loan that way.
It does pay to keep tabs on your credit score.
What else can I do?
Make sure you are registered and on the electoral roll. Another thing that any prospective lender will do is perform a credit check on you. To do this, they will need your name and address. If you are on the electoral roll and registered properly, they can obtain all your details from that. This can actually work in your favor too.
Keep making any current repayments on time, every time
The best way to improve your situation and obtain a bad credit car loan is to make sure you keep up with your payments on any current debts you may have. This will let your car loan lender know that you can be trusted to pay back any line of credit that they extend you. You are therefore much more likely to get a more competitive car loan deal, and if you keep up with this, it will also gradually improve your credit score too.
While in the process of applying for your car loan, you need to ensure that you do not get into any further debt!
Consider increasing your first deposit
Most car loan deals will expect you to pay a deposit. If you have a good credit score you might get away with a 10% deposit. Nevertheless, if you can increase the deposit, this will reinforce your agreement with the lender, and often give you a better deal in the long run.
Bad credit affiliations
Did you know that having financial links with people who have got bad credit could also be lowering your credit score? Even if these people were solvent and had credit in the past; if they now have poor credit, any evident links (e.g. you used to share a joint account with them or even a mortgage) will reflect on you too – even if you no longer have anything to do with them.
Consider bringing in a guarantor
Obtaining a bad credit car loan can be difficult. Maybe it’s worth asking someone you know to be your guarantor? This means that if you’re unable to make a payment at some point, this person will be required to pay the debt. You obviously need to find someone who is a) willing and b) trusts you. Most lenders will consider a guarantor loan to be much less risky and can then give you a better interest rate. Of course, the person you chose as guarantor must have a good credit score themselves, so the lender can see that they are stable and able to pay the credit if needs be.
What other types of car loans are available?
Bad credit car loans are usually offered to people who have a poor credit report and history. Those who are unable to secure a loan elsewhere. There are various sorts of car loans out there, and perhaps a personal contract hire plan or a hire purchase loan or even a personal loan might be the best solution for you. Spreading payments over an agreed period of time is the perfect way to finance your next vehicle if you’re not wanting to or can’t pay for the car in one go. Read on to find out more about these types of loans.
Personal contract hire plan
This type of car loan lets you rent a new vehicle for anywhere between two and four years. After an initial payment, you then follow this with a series of fixed monthly ones. At the end of the car loan agreement, you just return the car to the dealer. You don’t have to pay anything else provided you’ve stuck to the expected mileage limit and you haven’t damaged the vehicle.
However, you can’t buy the car at the end of the agreement. That said, this type of car loan is structured so that it is simple and your payments will usually be lower than other loan alternatives.
The beauty of a personal contract hire plan is that it is designed to suit your individual circumstances. Often, you can choose how much you put down as an initial payment, and then you can also adapt the length of the agreement. You can even set how many miles you are allowed to drive before you reach the threshold. Of course, the more adjustments you make, the more they will have an influence on the figure you are going to be paying out each month. So, try to pay as much as you can afford in that initial down payment, as then your ongoing monthly amounts will be lower.
But be true to yourself when you state your general annual mileage, because if you do go over that figure you’ll be penalized and you will then be forced to pay an additional fee because you’ve exceeded the limit specified on your car loan plan.
So if you’re wanting to keep your monthly payments nice and low, this is certainly an option worth taking a look at. And it means that you’ll be driving a relatively new set of wheels at all times.
Hire purchase (HP)
Well, this loan does exactly what it says on the tin. A hire purchase plan lets you spread the purchase cost over a specified number of years; usually at a fairly agreeable interest rate.
A hire purchase contract means that you’ll have bought the car outright at the end of the term, as the purchase price is spread over fixed monthly instalments for a term of up to five years. The beauty of this plan is that you will own the car once you’ve made that final instalment.
So if you’d like to own the car at the end of the car loan contract, you will tend to pay much less all in if you choose a hire purchase car loan agreement. Moreover, you won’t have to come up with a massive final payment in order to own the car.
The advantages of hire purchase at a glance:
- Spread the cost of the vehicle over monthly instalments
- The interest rate is lower than it would be with PCP
- Don’t need a massive final payment
- Hire purchase plans are often offered for new and also old cars
- You can often choose a “no deposit” option
The disadvantages of hire purchase at a glance:
- Monthly payments can be higher than they would for PCP
- You won’t actually own the car until you’ve made that last instalment
- You’ll lose out in the end if the car’s value decreases quicker than expected
- Higher monthly payments could reduce the range of cars available to you
The hire purchase car loan may be just right for you as you can adjust the initial deposit and determine the duration of the contract. Any of these changes will affect the ongoing monthly payments, but this all means that you can format the hire purchase loan to suit your requirements. If you can manage a decent deposit though, your monthly instalments will be lower as a result.
Hire purchase process:
- You pay the first deposit (the higher the better).
- You pay the balance of the car through a series of fixed monthly instalments that will continue for the duration of the agreed contract term.
- You are then the official owner of the vehicle as soon as you have made that final payment.
Taking out a personal loan means you can borrow a set amount of money for a specified term. Your loan is then paid back at the interest rate agreed (usually a fixed rate) over a number of months. You can usually take out a personal loan for any amount up to around $30,000. Personal loans aren’t just used to buy cars, they can be used to carry out alterations and improvements to a home or even to help try to consolidate debts. Some people opt for an “unsecured personal loan”. This is the same as a general personal loan, but you don’t have to give any kind of security or collateral (often usually your home) as a guarantee to clinch the loan in the first place. This will of course mean that you’re putting yourself at less risk, but unsecured loans will come with much higher interest rates – so that’s definitely something to think about.
Make sure you don’t apply for lots of loans
If a lender sees on your credit report that you’ve applied for a number of loans, this could be an indication that you are basically having financial issues and that you’re not able to cope with your situation. Each application for a new loan will lower your credit score. So be careful and really think about the necessity for any loan you are considering.
If you are thinking of applying for a particular type of loan, it pays to check on the eligibility conditions for each one of these so you can see which one is likely to best suit your situation. If you don’t want any of these applications to have a negative impact on your credit report, then you should not formally apply until you’re really sure that you want to go for that particular loan with that particular lender. Feel free to check with our team if anything remains unclear.