When you apply for car loan, potential lenders will tend to carry out a credit search on your credit report. If you have good credit you are more likely to be offered lower interest rates from your finance lender as you are seen of less of a risk. If you are applying for bad credit car finance, you may find yourself being offered higher interest or be declined for finance. If you’ve been refused car finance in the past, you know how disheartening it can be. However, there are many options available if you have bad credit.

What is Bad Credit?

Having a bad credit cane be caused by a number of things. Your credit score is based on your financial history, which can be found on your credit file. Your credit score is made up of your personal information, payment history, searches on your credit file and public records. Having missed or late payments, County Court judgements, entering into an Individual Voluntary Arrangement (IVA), being declared bankrupt or making the minimum payment on your credit card.

Car Finance Options

There are a few different types of car finance agreements you could consider. The most popular types of car finance in the UK include Hire Purchase, Personal Contract Purchase and Personal loan options. Each car loan agreement has the same underlying principle where you pay back an amount borrowed in monthly installments plus interest.

Hire Purchase

This is one of the most common forms of car finance in the UK. You essentially hire the car from the lender until you’ve made the last finance payment in the agreed term length. You won’t officially own the car until the final payment has been made. Also have the option to pay off the outstanding finance at any point by requesting a settlement figure. In some cases, this may incur charges.

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Personal Contract Purchase

A personal Contract Purchase agreement is similar to a Hire Purchase agreement where you take out a loan and pay it back monthly with interest. However, at the end of a Personal Contract Purchase agreement, you have 3 options. You can either hand the car back, you can use the resale value towards another car, you can pay the balloon payment and gain ownership of the vehicle.

Personal Loan

A personal loan can be used for pretty much anything. You can use the money to buy a car outright and become the automatic legal owner of the car. The loan is not secured against the vehicle so you can choose to sell the car at any point.

Guarantor loan

If you are struggling to get approved for finance, you could consider a guarantor loan to increase the chances of getting approved. Guarantor car finance is when a third party such as a friend or family member supports your application and if you are unable to meet the repayment deadline, they are agreeing to make the payment in your place. From the lender’s perspective, they have 2 parties agreeing to meet the repayment deadline so this gives them more security that the loan will be paid on time.

Increase Your deposit

There are many no deposit car finance options available, however, having a larger deposit can increase your chances of getting approved for finance. Saving up a bit of money each month before you apply for finance can work in your favour. Lenders tend to favour applicants with a deposit as you are more likely to pay your loan back on time each month.

Increase Your Credit Score

You can increase your chances of being approved for a car loan by improving your credit score before you start applying. There are a few easy ways in which you can increase your credit score.

Pay your bills on time

This may be difficult if you have had trouble making repayments in the past. However, even if you make your payments on time and in full for a few months, this can start to increase your credit score and show lenders that you are able to meet the repayment schedule on a potential car loan.

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Register on the electoral roll

Being on the UK electoral roll increases your chances of being approved for car loan as it helps lenders verify that you are who you say you are and also your address history.

Avoid links with people with bad credit

When you take out credit with someone else, you become financially linked. If you are financially linked to someone who has bad credit, this can be holding your credit score back and can negatively impact it. If you no longer have credit with someone who may have bad credit, its best to disassociate yourself.

Avoid multiple car finance applications

When you make multiple car finance applications in a short space of time, this can negatively impact your credit score. This is because too many hard searches on your file will be recorded on your credit file and the outcome is also noted. If you are shopping around for car loan, its best to stick to soft search applications only.