Using finance can be a great way to spread the up-front cost of buying a used or new car into more manageable chunks.
Unfortunately, the best car financing deals are often reserved for people with unblemished credit histories; meanwhile, those with a bad credit rating will generally find it harder to get a competitive finance package.
That’s not all there is to it though, and there are lots of things that borrowers without a good credit score can do to maximise their chances of getting a good deal when financing a car.
One option which we’ll explore in more detail below is Koyo, who use Open Banking technology, so that they can base lending decisions on your actual financial situation - rather than just what someone else says about you. If that sounds like a good option for you, you can find out more at www.koyoloans.com. Representative APR 27%.
For the full story, read on.
How can I get financed for a car with bad credit?
Borrowers with a poor credit score will certainly find it harder to get a car financing agreement, but that’s not to say that it will be impossible. To start with, let’s look at the three most common ways to finance a car (we cover these in more detail in our article on how car financing works in the UK):
A personal loan
One of the simplest ways to fund a car: you borrow a lump sum, use this money to pay for your car, and pay the total amount (plus interest) back in instalments. On the plus side, you own the car outright, so you can sell the car when you feel like it and don’t have to worry about mileage. However, it can be more expensive than other forms of finance, with a higher rate of interest.
Hire purchase (HP)
Slightly more complex: you make a deposit and subsequent monthly payments, but until you’ve made the final payment, you don’t actually own the car. The loan is also secured against the vehicle you buy.
Personal contract purchase (PCP)
You make a deposit and subsequent monthly payments until the end of the term. At the end of the term, you have the choice of making a final payment to buy the car outright or walk away. Monthly payments are lower, but as well as the extra payment needed to own the car, you’ll also need to worry about mileage and pay a penalty if you go over the agreed limit.
These finance options are available from new and used car dealerships, as well as banks and other specialist lenders - you’re not tied to a particular finance provider, or to the dealership you’re buying a car from.
When it comes to people with poor credit histories, while you’ll find that you have access to fewer deals and will be looking at higher interest rates, it’s likely that you will still be able to access financing packages in each category.
The important thing is to shop around, being careful to avoid “hard” credit searches, which leave a footprint, potentially making a bad credit history look worse (more on that later).
To help you choose the right type of car finance for you, check out our guide of the most popular types of car finance. We explain the options, with pros and cons for each.
What is the minimum credit score for a car loan?
This question is actually based on a false premise: there is no “universal credit score”. There are three credit bureaus (also known as credit reference agencies) in the UK, each of whom keeps records on borrowing and provides information from those credit files to finance companies.
Each of those bureaus (Experian, Equifax and TransUnion) will provide you with a score, but those scores are calculated on different scales - for example, Experian scores out of 999 while TransUnion has a maximum score of 720.
What’s more important is the range your score is in, which can go from “very poor” to “very good”. While there’s no minimum score required, would-be borrowers in the “very poor” category, who may have CCJs (county court judgements) against them and a track record of late payments, are likely to find it very difficult to access conventional forms of finance. Borrowers with a “poor” category should have more luck, and things get easier still for borrowers with a “fair”, “good” or “very good” score.
Check out our detailed guide where we explain exactly how credit scores work in the UK, and what you need to know to maximise your chances of getting car finance.
What are the best car loan options for borrowers with a bad credit score?
The answer to this question will depend on your individual circumstances and the loan amount you have in mind. Looking at bad credit car loans specifically, an Open Banking loan can be a great option for people with a bad credit score but who could still comfortably afford the monthly repayments on a loan.
Because credit scores are backward-looking (they focus on the past), sometimes they’re not really reflective of someone’s ability to repay a loan. Credit scores are largely based on your track record of repaying debt, and some people simply might not have had any debt in the UK to pay off: for example, consider:
Someone who recently moved to the UK for work, or
Someone who has just graduated from school or university.
Open Banking lenders such as Koyo place more emphasis on how affordable a loan is for you. They do this by using Open Banking technology to securely view your bank account data, and verify your income and outgoings.
Believe it or not, conventional lenders can’t do this when viewing loan applications, which is part of the reason why they need to rely on backward-looking indicators. To find out more, take a look at our full article: Open Banking explained.
If for whatever reason an Open Banking loan isn’t for you, a tool such as Money Saving Expert’s eligibility calculator is a good place to start: it will save you time by giving you a sense of which providers are likely to accept you for credit.
Alternatives to conventional car finance
It may also be worth considering some more left-field alternatives. Here are a few suggestions to consider - and one to avoid:
Car rental is unlikely to be cost-effective if you use your car every day, but for many people, a car is something we use on occasion. Particularly if you live in a big city, you might find that you’re able to take advantage of companies such as Zipcar and Ubeeqo which allow you to rent cars by the hour. If you use your car only for the weekly shop, for example, this could provide you with a significant cost saving, and mean you don’t need to access car finance at all!
Consider a cheaper model
Motoring Research has a great guide to saving money on a car purchase and points to serious savings you can make by making small tweaks to your requirements. If you save money on a car, you’ll reduce the amount you need to borrow, which will generally make finding credit much easier (and of course reduce your monthly repayments).
Their key takeaways include:
Downsize what you’re buying
Consider a pre-registered car or an outgoing model
Use online car brokers
Haggle on your trade-in
Buy at the end of the month
Similar to car rental, you may be able to avoid the need for a car altogether - and make some big savings - by car sharing. This can take different forms - for example taking advantage of a carpooling scheme to get you to work and back, or online services such as Turo which allow you to rent a local vehicle without having to travel to a car hire hub.
One to avoid: logbook loans
Logbook loans are loans taken out using your vehicle as security. In the UK, they’re seen as expensive and risky, and the Money Advice Service advises that you should “avoid them if you can”.
How can Open Banking lenders help you to get a car loan with bad credit?
As we’ve mentioned above, Open Banking lenders use secure technology to safely view your bank account data. By doing this, they can verify your income and outgoings, and get an accurate picture of how affordable a given loan is for you.
This gives them a real advantage: they can focus on affordability rather than just credit history when deciding whether to approve a loan. So if you don’t have a good credit score, but this isn’t reflective of your current circumstances, Open Banking lenders such as Koyo are a good option to consider.
How can I increase my chances of getting car finance?
There are two key steps you can take to improve your chances of getting car finance.
The first is to consider ways that you can improve your credit score. The Money Advice Service has a good guide to this, and you might be surprised by how simple some of the steps are - most notably, making sure you’re on the electoral roll and checking for any mistakes on your file.
Viewing your credit report is free. Although there might be separate premium options, each of the three credit bureaus will make your information available to you at no cost.
The second step is to shop around. As we’ve explained, you need to be cautious when you do this, to ensure that your applications don’t result in a high number of “hard” checks. This is where an eligibility calculator can come in handy, as well as providers who make a “soft” credit check (which doesn’t leave a footprint) - for example, applying for a loan with Koyo does not affect your credit score.