Purchasing a car can be an exciting time, but if you have a poor credit score, you may have worried about your options. However, there are routes that you can take to secure the finances you need, including bad credit car loans. These loans are designed to allow those with a low credit score to purchase a car, so if this is something that you think could work for your financial situation, here is everything you need to know before searching for a bad credit car loan.
Types Of Bad Credit Car Loans
There are three types of bad credit car loans that you may be able to apply for:
- Personal loan – this type of loan allows you to purchase the car outright and is not secured against the vehicle. You will pay monthly, usually with interest, and own the car from your initial purchase.
- Hire Purchase (HP) – this type of loan is secured against the vehicle with regular monthly repayments up to the value of the car plus interest. This means that you are guaranteed to own the car at the end of the term.
- Personal Contract Purchase (PCP) – this is a loan that is secured against the vehicle with regular monthly repayments. You will only pay the depreciation value of the car and there is usually the option to purchase the car at the end of the term.
Each type of loan has advantages and disadvantages, and what may be suitable for someone else may not be ideal for you. Before seeking an agreement, you should assess your situation and finances to see which option would work for you.
How Do Bad Credit Car Loans Work?
Most lenders who offer bad credit car loans will typically base their lending decisions on affordability, rather than your whole credit history. This will involve reviewing your current financial position, so they may check your current income, regular outgoings, and financial commitments. They may also view your recent credit history, but your overall affordability will be able to show whether you are in a stable enough position to make the monthly repayments as required.
Will Applying For A Bad Credit Car Loan Affect My Credit Score?
To avoid damaging your credit score, you should do your own soft searches to find lenders that offer bad credit car loans. You can search online to make your own comparisons or use comparison tools to search for providers that work for you. It is also essential to check you fit the eligibility criteria before applying.
Typically, submitting a standard application should not harm your credit score, unless a credit check is agreed as part of the process. Once a lender has reviewed your application, they will usually then need to perform their checks, which may impact your credit rating. However, by agreeing to car finance and making sure that you make the monthly repayments, you may be able to improve your credit score over time.
How Can I Improve My Credit Score?
If you would like to improve your credit rating before seeking a car loan, there are several steps that you can take, including:
- Avoid applying for credit too many times in a short period of time
- Pay off any high levels of existing debt
- Make sure that your name and address is on the electoral roll
- Update any bills with your new address if you have recently moved house
We hope that this guide to bad credit car loans has helped you to decide whether this is a good option for your car purchase. However, if you are worried about making the monthly repayments on a loan or have recent marks on your credit history, please seek financial advice before applying.