When buying or leasing a new or used car or van, one of the most important parts of your research should be to know your own credit rating.
People with a poor credit, bad credit or with no credit history will generally face much higher interest rates than those with an exemplary record or struggle to obtain credit at all. So what is the best method of bad credit car finance? What vehicle finance options do you have if you have bad credit and what can you do to improve your credit rating? This guide to bad credit vehicle finance will explain your options.
- Why credit is so important in car finance.
- How to improve your credit rating.
- What if you don’t have any credit?
- Is it best to lease or buy with bad credit?
Research is the key to finding a good deal on a new or used car or van – but that means knowing as much about your personal circumstances as the vehicle you wish to drive.
Your credit rating directly influences the level of interest you will be asked to pay on any credit agreement. Leasing companies will also generally ask for higher interest rates if you have a poor credit history. Alternatively, a leasing company could ask for larger down-payments or a security deposit to reduce the risk level from its perspective.
Therefore, if you have poor credit, vehicle finance can be difficult to obtain. Furthermore, every application you make that is unsuccessful will further harm your credit rating. Consequently it is absolutely crucial to know your credit rating before you approach a lender or leasing company. Then if you have bad credit, you have time to turn it around before applying for finance.
To improve your chances of a successful car finance application, you can attempt to improve your bad credit rating ahead of time. However, this cannot be done in a matter of days or weeks – you should make a concerted effort to enhance your credit over at least a six month period. Almost every single adult in the UK will have a credit file, and specialist agencies keep a record of your bills, debts and repayments to make a recommendation to your creditworthiness.
Here is a quick guide to the steps you can take to improve your credit rating:
- Acquire a copy of your credit report – This can be done through credit reference agencies such as Equifax, Call-Credit and Experian. Look for any inaccuracies on the credit report – it may be that there are some mistakes which can be altered in your favour.
- Keep your current accounts up to date – Close any old accounts that you don’t use and ensure you are not slipping into an overdraft.
- Take out a credit card – Taking out a credit card and paying off the balance in full each month is a quick and easy way of enhancing your credit rating. Make sure you can stay on top of any charges however, because if you can’t afford to pay the debts you will exacerbate the problem. Look for cards with 0% introductory rates on purchases and balance transfers.
- Pay all your bills on time – Make sure the bills are in your name and make all of your payments on time. Use Direct Debit where possible, to ensure you don’t miss a payment date.
- Electoral Roll – make sure you are on the roll and that there are no mistakes regarding your name and address.
- Do not take out more than one loan at a time – Show that your payments are manageable. If you have several loans out at once you are deemed more likely to default on a payment.
- Reduce number of applications – Remember each rejection can damage your credit rating. So if you know you will not receive the market-leading loan due to your bad credit, don’t bother applying for it.
Many young adults who live with their parents face the difficulty of having no credit at all – good or bad. In this instance it’s important to know what lenders look for as you attempt to establish credit:
- Monthly income – This must be at a level where you can comfortably afford to pay your vehicle payments on top of additional bills.
- Consistent address – It helps to have the same registered address for six months. This gives the indication that you are not likely to skip town!
- Consistent employment – Show that you are settled into a job and that you have a reliable wage. Generally you should be employed by the same company for at least six months.
- No black marks – Show that you can pay bills on time for a consistent period, ideally a year or more.
- Co-sign – If you have no credit history, it is often a good idea to have a co-signer on a loan to lower your payments, such as a parent or someone you know who has a good credit history. This will help you build your credit rating but will place added pressure on you to pay your bills on time as any defaults will reflect on both you and the co-signer.
There are pros and cons to leasing and buying a vehicle as your chosen method of car or van finance if you have bad credit.
If you want to buy a car you may have to approach a bad credit car loan lender. The high risk level will usually mean a higher rate of interest. However, if you can afford to make monthly payments you can quickly build your credit rating and you have the advantage of owning the car. By shopping around you should be able to secure lower rates.
Leasing companies are often considered a better option for people with bad credit as a car lease will usually carry lower monthly payments than a car loan. However, the car is never yours and you might have to stick to a strict mileage limit. The leasing company may also request larger down-payments or security deposits if they consider you to be a high risk borrower.
The good news for anyone looking for bad credit car finance is that increased competition in the market means more lenders and leasing companies are likely to consider your circumstances.