Having credit problems can certainly limit your possibility of being accepted for a car loan, though there is still hope as many companies now offer bad credit car loans, giving a multitude of people the opportunity to own a car.
Why does my credit rating affect my chances of getting a car loan?
Your credit rating will reflect how safe of a borrower you are perceived to be. Though a lender won’t be able to see your rating, they can see your credit history which helps them evaluate how well you have been able to manage your debts in the past. It’s a way for the lender to predict your ability to repay the loan based on your past behaviour.
There are various reasons as to why someone might have a bad credit history and some lenders will be willing to take factors into consideration when offering loans. However, many people will find that lenders may offer poor car loan options and those with a high interest rate, while some car finance companies will reject applicants completely.
Building up your credit score is time-consuming and may not be practical if you need to get on the road ASAP. However, it’s not all doom and gloom – there are several viable options for those who currently have weak credit scores.
Hire purchase agreements
Simply put, this type of loan involves borrowing a car from the dealer and paying off the purchase price of the vehicle in monthly instalments. The car is then yours to own once all of the instalments are paid. This improves acceptance chances for those with poor credit as it is less risky and means that a lender can take the car off you if any payments are missed.
This type of loan involves having a relative or close friend act as your ‘guarantor’, which means that they are agreeing to take on your debt if you fail to make payment. However, a guarantor should only agree to be your co-sign if you are certain you can repay the debt, as failing to do so can adversely affect both yours and your guarantor’s credit rating, not to mention potential legal action being brought against you.
Guarantor loans are seen as less risky, so many finance lenders will offer better deals with lower interest rates. Nonetheless, your guarantor will also need to be credit checked and the application may be rejected if their credit score is poor too.
This is the riskiest option for the lender, so monthly repayments tend to be costly. However, if having a car is a matter of urgency, this could still be a possible route. Many lenders will not accept this type of finance at all, though some use it specifically for those with poor credit.
The term ‘non status’ is used because the borrower’s credit history won’t be the primary deciding factor when accepting or rejecting the application for a car loan and will instead look at all the circumstances.
It’s a good idea to speak to lenders off-the-record and find out what your options are, as each lender will have different criteria and some will be more lenient than others.
You should absolutely avoid making several loan applications within a short time frame, as each time you do your credit will be checked and this will be recorded and can actually worsen your score.
Moreover, if you are in doubt over your ability to handle debts, it might be wise to speak to a financial advisor and come up with a plan which suits your personal requirements.