Financing a car when you have a poor credit history can be challenging.
With options limited, it is important to ensure that you have all of the important information before making any decisions.
We look at some of the options you have when buying a car.
There are many ways to finance a car
Before we discuss the options for those with a poor credit history, we will just start with the typical ways that you can finance a new or used car.
a. Hire Purchase
You typically put down a deposit of 10% and then make monthly payments to the value of the car for between one and five years.
While this may sound like a loan it is not, for you do not legally own the car until you have made your final payment.
The upside of this is that you may be able to return the car at the end of the term. The downside is that until you’ve paid one-third of the total amount, the lender can repossess the car without even a Court Order.
There are companies who will provide hire purchase options for those with bad credit, and they do this because the lender has the car as security if you stop paying they can repossess the car.
b. Car Leasing
When you lease a car you never own it, it is a long-term rental. There are typically restrictions on mileage and modifications to the vehicle, plus you need to return the car in good condition.
The advantage is that many agreements include non-fuel running costs, which include car tax and servicing, thus simplifying your payments for your vehicle.
With some agreements you may have the option to purchase the vehicle at the end of the term.
We have found that the options for car leasing when you have poor credit are limited, though if you search online you may find something.
c. Personal Loan
A personal loan is simply taken out from a bank or lender, and the rate of interest you pay usually relates to your credit rating and the amount you borrow.
Loans are normally restricted to those with a good credit rating.
The advantage of a personal loan rather than a hire or lease agreement, is if you have difficulty with your monthly repayments you will not have your car immediately repossessed.
A Guarantor Personal Loan
For those who are unable to get a personal loan because of their credit rating, there is the option of a guarantor personal loan.
This is simply where you find a friend or family member to be your backer for the loan; though they will need to have a clean credit history.
These types of loans have representative APRs of between 39.9% and 54.9% depending on the lender, amount borrowed, and over what term.
For more details, see our Guarantor Loan page.
We are not car loan specialists, and there are currently cheaper forms of guarantor finance as described below.
We do hope to have partnered with these lenders soon so we can provide you these loan options.
Guarantor Car Finance
The concept of this type of finance is very similar to a guarantor loan, where a third party with a clean credit history backs your loan.
This type of car finance is often cheaper than a guarantor loan because they are typically secured against the car, and therefore the lender has both the security of your guarantor, as well as the vehicle itself.
Typically, the finance cost is around 25.8% APR.
How to put your guarantor at ease?
When someone guarantees a loan they will be worried about the situation of non-payment, even if they do not admit it.
They may be agreeing to be do this to support you and because of your relationship, but it is worth spending some time reassuring them (think what you would want if you were in their shoes?).
We suggest the follow the following steps:
a. Display what you can afford
It is worth being ‘open book’, and showing them that you have spent time calculating your income and expenses and that you can comfortably afford the monthly repayments.
b. Have a good reason for having the money
If your reasons for the money are sensible, then this will sit much more comfortably with your loan backer.
c. Only borrow what you need
Even if you can afford the monthly repayments for a loan which is larger than you need it may not sensible to do this. Loans cost you money and minimising interests costs will help you to get back on to the road to a future clean credit history.
Other loan options when you have a bad credit rating can be very expensive; with interest rates from between 272% and 1575% APR.
We do not recommend this type of loan for a car purchase as the costs can get very high.
For more reading on your car finance options see the moneyservice.org.uk’s article What’s the best way to finance buying a car?
To find out more, please see our Guarantor Loan page