Bad credit car finance | Can I get a car loan with poor credit?

Bad credit doesn't mean you can't finance a car
HP agreements are the easiest to get
Interest rates worse for people with poor ratings

Written by Murray Scullion Published: 7 February 2022

Getting car finance with bad credit can be tricky. Whether you’re choosing a PCP (Personal Contract Purchase), HP (Hire Purchase) or PCH (Personal Contract Hire) agreement your lender will perform a credit check to look at your credit history.

Lenders perform credit checks to ensure you can afford the monthly payments. People with excellent credit scores have demonstrated a firm grasp of their finances. They haven’t missed payments, have unbroken employment records and don’t have CCJs (Country Court Judgements) against them.

Credit ratings are imperative because people with excellent credit scores are eligible for offers such as 0% APR, people with okay scores will only have access to higher rates, and people with bad credit ratings might not even be offered car finance at all.

This article focuses on getting a car with a PCP or HP style finance agreement. If you have bad credit and you want to lease a car, read: the Parkers guide to bad credit car leasing

How to get car finance if you have bad credit

Choose the right type of car finance

PCP and HP finance agreements are generally easier to get with poor credit than leasing. This is because you’re only financing a portion of the car’s total cost.

Out of the two, HP schemes are the easiest to get if you have poor credit. This is because the value of the loan is secured against the car. This means that if you miss payments the finance company could repossess the vehicle to settle your debt.

As the finance is tied to the car, the risk to finance companies is less through HP than if you paid for the car with an unsecured personal loan. As a result, even if you have been turned down for a standard bank loan, you could still be approved for a HP scheme.

Improve your credit score

If you have time on your hands, improving your credit score is a sure-fire way to get accepted for car finance. It also makes you eligible for better APR, which are reserved for people with high credit scores.

>> Money Saving Expert: how to improve your credit score

Check your credit rating

You can check your rating for free. There are three major credit reference agencies, called Experian, Equifax and TransUnion. Once you sign up, the first job here is to see if you can spot any errors. If you can, tell the agency. They will have 28 days to look at it, and amend it if necessary.

Get your finances in order

Settle your loans. Close redundant accounts. If you have someone on a joint account who isn’t paying their way, get rid. Doing these things can drastically improve your credit score. However, the effects can take months to show up.

Poor credit? There are still options

If you have a poor credit score and don’t have time to improve it, there are still a few things you can do.

There are variables when taking out a car finance agreement and changing these can work in your favour.

Choose a lower annual mileage limit

Your projected mileage during the term of the deal is another factor in its cost. By opting for a lower mileage limit, the car will be worth more at the end of the deal, costing you less each month to finance. Be realistic, though, because if you exceed the mileage allowance you’ve financed you will have to compensate the finance company for the extra wear and tear on the car in the form of a penalty that charges you for every extra mile.

Pay a larger deposit

You may have no choice but to pay a larger sum up front but doing so will reduce your monthly payments and the finance company’s exposure, improving your chance of getting that deal.

Pay a higher interest rate

You will probably be asked to pay a higher interest rate than the advertised one. It may only translate into a slightly higher monthly payment, though, so don’t reject it without checking.

Choose a used car

Depreciation, or the difference between what the car is worth at the start of the deal and what it’s worth at the end, is key to the cost of a PCP deal since it’s this cash difference that you’re financing. New cars lose well over half their value in their first three years and many lose up to 30% in their first year alone. It makes sense, then, to take out a PCP deal on a used car that has already suffered much of its early depreciation. This will mean lower monthly payments that may be closer to what, given your credit rating, the finance company thinks you can afford.

Also if you see a used car on sale with money off, you’ll be borrowing less money from your provider. Remember, the less you need to borrow, the higher your chances of being accepted.

However, it’s worth remembering that used cars generally have higher APR attached than new car purchases.

>> Search for used cars