Thinking about applying for car finance with bad credit?

Car finance is a great way to buy a car, without paying the full price all at once. Instead, you can split the cost into monthly payments over a set period.

Financing a used car with bad credit can be harder to get, but there are some lenders who may consider helping those with credit problems.

HP car finance (hire purchase) is one often considered a flexible option to finance a used car. It may be more accessible for people with lower credit scores, making it a popular choice for those who need financial support to buy a vehicle. 

Understanding your credit score

Before applying for car finance, it’s important to understand how your credit score can affect your chances of getting approved. Knowing your credit score can also help you understand why you may not have been successful in getting finance before.

A credit score is a number that reflects how well you manage repaying money. It usually ranges from 300 to 850, depending on the credit reference agency.  Lenders use this score to decide whether to give you credit, like a loan or credit card, and what interest rate to charge you. 

• Poor (300-579): This score suggests a high risk for lenders, meaning they might be less likely to approve your application.
• Fair (580-669): If your score is in this range, you might get approved, but expect higher interest rates.
• Good (670-739): A good score generally qualifies you for better rates and more favourable terms.
• Excellent (740 and above): This score opens the door to the best financing options available, often with the lowest interest rates.

It is important to note that not all lenders use the same scoring models, and other factors may influence their decision.

If you are in a challenging position and need a lender who offers car finance with bad credit flexibility, clearly communicating your financial situation and demonstrating your affordability can be helpful.

How credit scores are calculated

Credit scores are typically based on varying factors such as:

• Payment history: This is the most important factor. It tracks whether you make your payments on time. Late or missed payments have a significant negative impact on your score.
• Credit utilisation: This measures how much of your available credit you are using. It's best to try keep your balances low, compared to your credit limits. Keeping your credit utilisation rate below 30% is generally viewed positively by lenders.
• Length of credit history: This factor considers how long you’ve been using credit. A longer credit history can positively influence your score, as it demonstrates experience in managing credit.
• Types of credit: Having a mix of different types of credit accounts, such as credit cards, a mortgage, and a car loan, can enhance your score. This diversity shows lenders you can handle different types of credit responsibly.
• New credit: If you apply for several new credit accounts in a short period, it can lower your score. Each application typically results in a “hard search,” which could signal to lenders that you are taking on too much debt.

By having a better understanding of how these factors can contribute to your credit score, you can take proactive steps to improve it over time, such as paying bills on time, reducing credit card balances, and avoiding unnecessary credit applications.

How to check your credit score 

Keeping track of your credit score is easier than ever. Most credit reference agency websites, such as Experian, Equifax and TransUnion, provide online tools and monthly reports. These platforms are user-friendly and allow you to stay informed about your current credit score. 

Additionally, you can sign up for free services like Credit Karma or ClearScore, which offer free credit reports and valuable insights on improving your score. These services can help you monitor changes, track improvements, and identify factors that may be negatively affecting your credit.

It’s also a good idea to regularly review your credit report to catch any errors or potential signs of fraud. Reporting inaccuracies to the relevant credit agency can help protect your credit score.

How credit scores impact your car finance rate 

When you apply for car finance, lenders check your credit score to assess the risk of lending you money. They also consider how much active credit you currently have and how this may affect your ability to afford monthly payments. 

If you have a lower credit score, you may face challenges such as:

• Higher interest rates: Borrowers with adverse credit are considered higher risk, which can result in higher monthly payments.
• Limited financing options: Banks and mainstream lenders may decline applications for lower scores, potentially leading you to consider alternative or specialist lenders.
• Shorter terms: Some lenders might offer shorter repayment periods, which can lead to higher monthly costs. 
• Extra fees: Be aware of potential additional costs, such as application fees or higher insurance costs, and ask for all fees to be disclosed upfront. 
• Limited lending: Lenders may restrict the amount they are willing to lend, which could mean compromising on the vehicle you choose or saving for a larger deposit. 

Finding a lender for poor credit scores

Not being approved by some lenders for car finance doesn’t mean you will be declined by all. Some lenders specialise in car finance with bad credit.

Each lender has its own criteria and scoring system. If one lender refuses your application, it doesn’t mean all lenders will.

Some key factors that specialist lenders may require include: 

Guarantors

If your credit score is lower than average, some lenders may require a guarantor to support your application. A guarantor is someone who agrees to take legal responsibility for repaying the loan if you fail to make the payments.

When you include a guarantor in your application, the lender will evaluate their financial profile, including:

• Credit score: The guarantor’s credit history plays a critical role in determining their eligibility.
• Income and expenses: Lenders assess the guarantor’s ability to cover the loan repayments if needed.
• Assets (if applicable): Some lenders may consider the guarantor’s assets for additional security.

The guarantor does not have shared ownership of the vehicle and is not a party to the finance agreement for use of the vehicle. However, they remain legally liable for repayment of the debt if the primary borrower defaults. It’s essential for guarantors to fully understand this responsibility before agreeing to the role.

Joint Hirers

In some cases, instead of using a guarantor, you may have the option to add a joint hirer to your application. A joint hirer is someone who co-signs the finance agreement with you, meaning they share ownership of the vehicle and are equally responsible for the repayment of the loan.

Key points about joint hirers:

• Shared responsibility: Both individuals named in the agreement are equally liable for the loan repayments.
• Combined evaluation: The lender will assess the credit scores, incomes, and financial commitments of both applicants to determine affordability.
• Ownership rights: Both parties have joint rights to use and possession of the vehicle, as outlined in the agreement.

Joint hirer arrangements are common when both applicants intend to share the use of the vehicle or when one party alone does not meet the lender’s credit or affordability criteria. It’s important for both parties to agree on their responsibilities and understand their obligations under the agreement.

Trackers

Some lenders may require a permanent tracker to be fitted to the vehicle as part of the finance agreement. This tracker allows the lender to monitor the car's location, which provides additional security for the loan.

In the event of missed payments, the tracker could enable the lender to either disable access to the vehicle or facilitate its recovery. This is typically outlined in the terms and conditions of your finance agreement, so it’s important to review these carefully.

The cost of installing a tracker may incur additional fees, depending on the lender. Before entering into an agreement, confirm whether the tracker installation cost will be charged upfront or included in your monthly repayments. Understanding these charges ensures transparency and avoids unexpected costs later.

Deposit 

A deposit may be required as part of the finance agreement to reduce the overall amount you intend to borrow. While deposits can sometimes be optional, lenders are more likely to require a minimum deposit from applicants with lower credit scores. This helps mitigate the lender's perceived risk.

Lending is fundamentally about assessing and managing risk. By paying a deposit upfront, you demonstrate a financial commitment to the agreement, which can improve your chances of approval. Additionally, a higher deposit often results in lower monthly payments and interest costs, reducing the overall expense of the loan.

Before entering into a finance agreement, confirm the exact deposit amount required and how it will impact your loan terms, including the repayment schedule and total cost of borrowing.

Income assessment 

Lenders may provide an initial conditional approval for your application, but final acceptance typically depends on the completion of a detailed income assessment. 

This assessment usually involves providing comprehensive information about your income and expenses, along with supporting documents such as recent bank statements and proof of employment.

The primary purpose of this assessment is to ensure that the loan repayments will be affordable for you without causing undue financial strain. This aligns with the lender’s obligations under responsible lending practices.

When it comes to finding the right lender, you have two main options:

1. Research lenders: Take the time to look into multiple lenders that specialise in providing car finance with bad credit. By comparing their rates, terms, and conditions you can find one that suits your financial situation. Be cautious of lenders with significantly higher APRs, as these can increase the overall cost of borrowing.
2. Use finance brokers: Finance brokers often work with a network of lenders and can assist in finding competitive rates. Their expertise in lender requirements can streamline the application process, helping you prepare the necessary documentation and avoid delays.

Thorough research and preparation can improve your chances of approval and help you secure a loan with favourable terms. For more information on applying for car finance you can read our guide How to apply for finance on a car.

Why am I still getting refused car finance? 

If you have a good credit score but are still being declined for car finance, there could be other factors affecting your applications. These factors might include:

• Employment status: Lenders look for stable employment, as a steady job indicates a reliable source of income.
• Income level: Your income plays an important role in determining your ability to make monthly payments. Lenders want to ensure you earn enough to cover your expenses.
• Address history: A stable address history is important. Frequent moves or a short time at your current address may raise concerns for lenders about your reliability.
• Debt management programs: Being enrolled in programs like IVAs could deter lenders due to perceived risk.
• County Court Judgments (CCJs): Even historical CCJs could impact applications. 

Understanding these reasons and addressing them, where possible, can improve future applications. 

To learn more about the reasons for being refused car finance you can read our guide “What to do if you’ve been refused car finance?”

Could AutoMoney help me get car finance? 

At AutoMoney Motor Finance, we take all of our customers' circumstances into account. We understand that not everyone has a perfect credit score, and we have successfully helped many people nationwide with lower credit scores obtain car finance. 

Our commitment includes ensuring:

1. Products that align with your needs.
2. Clear and transparent communication throughout the process.
3. Fair treatment in line with Consumer Duty standards. 

Apply for car finance 

If you think HP car finance is the best option for you, AutoMoney Motor Finance offers a range of vehicle financing solutions nationwide. 

To see if we can help you, call our friendly team on the free phone number above, or click through to apply for car finance  with us. 

Representative example

You could borrow £10,000 over 60 months with an initial payment of £490.66 (including £199 Admin Fee) followed by 58 monthly payments of £291.66 with a final payment of £490.66 (including optional £199 Option to Purchase Fee).

Total amount repayable will be £17,897.60.

29.3% APR, annual interest rate (fixed) 24.7%.

This example uses the representative APR. This is the rate at least 51% of customers are expected to get.

Lending is subject to status and additional affordability checks. Rates quoted are subject to change and will depend on lending amount and personal circumstances.

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