Credit Scores and Car Finance

If you are planning to buy a car it is a good idea to review your credit score first so you can make sure you are in the best shape to apply for a loan. Your credit score is an important factor in determining the interest and terms you will be offered.

What credit score do you need for car finance?

Your credit score is a tool you can use to give you an indication of how likely you are to be accepted for a loan. A lender will use all the information on your credit report, along with details on your application to approve any lending decision.

Lenders have different criteria and different specialisms in the marketplace so an acceptance or decline depends on the company who providing the financing. Just because one company declines your application doesn’t mean you can’t get credit. Different lenders may also use different credit scoring models. Some scoring models assign different weights to various elements in your credit score than others, which can cause scores to vary.

How do credit scores affect car finance?

Many lenders do not rely on the credit score alone but look at the entire financial history of a borrower to make a decision. If you apply for car finance, the lender will want to see what other finance products you have had in the past and how well you manged that debt.

How can you get car finance with a low credit score?

Lenders have different levels of risk appetite and specific criteria for assessing creditworthiness. Having a low credit score doesn’t mean you can’t get any car finance. There are some lenders that specialise in approving loans for borrowers with poor credit, but these types of loans typically come with higher interest rates and less favourable terms. Loans that are secured with an asset such as a car, bike or boat, are often easier to get than unsecured finance and also, therefore, have a lower interest rate.

What are the different types of car finance options available?

There are several types of finance arrangements for those looking to purchase a new vehicle. To find an arrangement that suits your personal circumstances and requirements research the different options thoroughly before applying.

Many people fund their new car with a personal loan. Personal loans can vary in terms of the repayment period and interest rate and terms offered. What you are offered will depend on the total required and the strength of your credit history. Personal loans often come with a higher monthly payment but this means that the total amount to be repaid will be less than other types of arrangements such as hire purchase or personal contract purchase. As a personal loan is not secured on the asset there may be cheaper options, however, a personal loan means you will own the car outright, once the money has been paid to the dealer and the debt you owe will be to your lender.

Hire Purchase (HP) is a finance agreement which, after an initial deposit, consists of monthly payments over a fixed term. You will not own the car until the final payment has been made. Because the arrangement is secured on the vehicle, if you fail to keep up the repayments you could face a repossession order.

A more popular form of Hire Purchase is Personal Contract Purchase (PCP); these are similar to HP agreements with a deposit, a fixed term and monthly repayments. The repayments are calculated on the depreciation of the car’s value; however there is a balloon payment at the end of the term which equates to the minimum future value of the car.

Many people prefer to lease a new car and personal leasing means you pay a fixed monthly cost to use a car, which may also include servicing and maintenance. You will normally have to advance three months’ rental up front, and may face extra costs if you drive more than the expected mileage. This type of arrangement means that you are essentially only renting the vehicle for an agreed term and this is a good option for people who don’t have enough money for a deposit.

What deposit do you need for a car?

With hire purchase, you usually need to put down a 10 percent deposit. The rest of the balance and interest can be spread in fixed instalments over one to five years.

With a PCP, you might also have to raise a 10 percent deposit, but the repayments could be lower than hire purchase. PCPs typically run for between one and three years. 

When you lease a car, you pay a fixed monthly cost to use a car, which usually includes can also include servicing and maintenance. There will usually be an arrangement fee for the contract and a ballooned first payment that would include your deposit.

Is it better to own or lease?

Choosing the right type of finance plan is down to your personal preference, your ability to raise a deposit and the type of credit limit that you are likely to be approved for.

Do you have to get car finance from the car dealer I use?

Car dealers often use preferred partners or retail finance companies for their finance deals and receive a commission for the referral. This often means they are not always the cheapest in the market. Many people think that car dealerships are the only place you can get car finance but this not the case. Shopping around may get you a cheaper product. You can compare the cost of a finance plan that you’re offered in a dealership with like for like offers from other lenders. If you find a cheaper APR from another lender, you may save money on the overall cost of the loan, even if you’re offered upfront discounts in a dealership.

What happens if you are refused credit for a car?

Try to research how likely you are to get a loan or finance prior to applying. You should also work out what the total monthly repayments will be (including fees and interest) and then budget how you will be able to make the repayments. Checking your credit report in advance will flag up if you have any negative actions which might cause a decline from a lender.

If you apply for finance and are rejected, then you may need to identify and address any issues with your credit file. Make sure you are registered on the electoral roll, so that lenders can verify your identity and pay off any outstanding debts where possible. If you have missed payments, defaults or even County Court Judgements (CCJs), it may take some time for your credit history to improve.

It can be worth shopping around, as being refused credit by one lender won’t mean you’ll be rejected by all of them, however, multiple credit applications in a short space of time can be a worry for some lenders.