If you apply for a loan to buy a car with a finance company or a bank you will be asked to complete an application form and your credit score will be assessed from your answers and by a process of cross referencing your personal details with one of three credit reference agencies:
It's a standard procedure and the results determine your chances of securing a loan and the terms you will be offered. These agencies are obliged to provide you with a credit report for £2 or you can pay a monthly subscription which will give you open access to your file. If you have experienced credit problems and are trying to improve your credit score the agencies may be able provide you with tips and advice to help you and Experian have recently committed to providing a free credit score for life which is simple and easy to access on their website.
Following the banking crises of 2008 the financial services industry was forced by the government to take on greater responsibility for vetting applicants for loans. They had had their fingers well and truly burnt after dishing out loans with inadequate controls, considered a major contributory factor behind the 2008 crash. As a result, lending money is now subject to greater regulation and the application process more formalised. Essentially, as a prospective borrower you will need to demonstrate you can afford the repayments and lenders must be seen to be far more rigorous in their vetting procedure.
When you apply for a loan, you will be assessed for risk which will be determined by looking at things such as home ownership, employment status and previous payment history. Those who own their own home, have a reliable employment history and no record of defaulting on loans or household bills will be considered a low risk. But if you are self- employed, in rented accommodation and have a recent High Court judgement for non-payment, things will be very different.
In the case of a car loan, the finance company or bank may have security in the form of the vehicle they are lending against but nonetheless the collection process against a default is expensive and of course, the car may be worth less than the outstanding debt. Hence the reason those who have not had the opportunity to build a credit history or those with a poor credit history may find getting car finance difficult or at least, expensive.
If you are perceived as high risk the bank or finance company has the option to turn you down or to offer finance at a higher price. It's an unfortunate fact of life that those least able to afford it are often charged the most. However, the good news is that interest rates are at an all-time low, so even with a slightly 'iffy' credit history you may be able to secure the finance you are looking for. Not all providers lending decisions are based on the same criteria so it's worth shopping around if you feel dissatisfied with the terms you have been offered.
Some finance companies specialise in loans for those with a poor credit history click here, but expect to pay a higher interest rate.
Ways to secure a loan with a poor credit history
A poor credit score does not last forever and over time you can turn it around. Six years is generally the maximum time any ‘black marks’ will remain on your file and their influence will decline over time, especially if your record since, has been good. Without wishing to state the obvious a good starting point is to make sure you are living within your means and paying your bills on time. It’s worth cancelling surplus credit cards and making sure you are on the electoral roll as this is interpreted as a sign of stability. If you have a joint account or mortgage with someone with a bad credit record this can also adversely affect your credit score so, if your credit score is important to you, you may be advised to re-jig your financial affairs.
It’s not unheard of for the credit agencies to make mistakes and they can be challenged if you think this is the case. If someone has fraudulently cloned your credit card for example this may well be picked-up by the credit agencies. If so, contact them immediately and get them to investigate and clear your report.
If you have only recently left school or college and live at home with parents, it’s unlikely you will have had the opportunity to build up a credit score of your own and getting finance for a car may be difficult. One way around this, particularly if you need a car to get to work, is to persuade parents, other relatives or even possibly your place of work to act as a guarantor. You will still be responsible for the repayments but if you default the finance company would approach the guarantor to clear the debt.
Use our loan calculators to work out what your monthly payments may be and look too at our cost of car ownership tool to work out the full financial implications of owning and running a car. Once satisfied you know what you can afford you can approach lenders and potential guarantors.