1. Introduction and definitin of bad credit car finance
Bad credit car finance is a product intended for people who are looking to buy a car with bad credit, whether it be required for work, family commitments or any anything else for that matter.
It’s often also referred to as subprime lending or none status car financing.
This type of finance can fulfil an immediate need by enabling you to jump behind the wheel of your very own car, even if you have a history of bad credit and don’t have the capital to purchase a vehicle outright.
However, given the risks involved in lending money to people with bad credit, higher interest rates and less favourable terms will apply.
2. Car Finance with CCJs, Defaults, Arrears and Bankruptcy
Typically a bad credit car buyer is defined as an individual who has missed a payment, been issued with a default, recieved a County Court Judgement (CCJ), or been through a bankruptcy order.
Despite financial mishaps of this kind remaining on your credit file for a minimum of 6 years, lenders who offer car finance with bad credit will consider applications from people with one or more, even if they are current.
In addition, some lenders will overlook such blemishes entirely after 4 years.
Applying for car finance while bankrupt
In England and Wales, you are legally obliged to tell a potential lender about your bankruptcy if the amount you intend to borrow exceeds £500, this will almost always be the case when applying to finance a car with bad credit.
Failing to do this could leave you in breach of your bankruptcy order and may even constitue Fraud.
3. Am I eligible for bad credit car finance
Although a survey conducted by iVendi suggests that as many as 4 in 5 consumer are eligible for a consumer car finance package, it’s important to be realistic.
Even if you do qualify you may have to make long term financial sacrifices in order to manage the repayment cycle on a bad credit car finance agreement.
In terms of specific eligibility criteria, each lender has its own list, but the key factors that are used to determine whether you are able to finance a car with bad credit can be broken down into a relatively short list.
Unfortunately the only way to know for sure whether you will be accepted by a particular lender, is to apply.
Common eligibility factors:
- Age – By law the minimum age for car finance applicants is 18 as it is with any other form of credit. That said, specialist lenders will often only consider applications from individuals over the age of 21 and some go one step further, setting the bar at 25. In addition, most lenders have upper age limits which can range from 65 – 88.
- Employment & Income – Income is an important factor for just about all lenders who offer car finance for bad credit. If your income comes from employment, most lenders will expect you to have completed your probationary period and be in a full-time role. You may also be asked to provide proof of employment (i.e. wage slips, P60, ect). Your income can also come from being self employed though it may be harder to obtain an approval. Even people on benefits can get car finance, though proof will be required and minimum income requirements will still apply.
- Country of residence – The country in which you officially reside is also a factor taken in to consideration by finance companies. If you’ve been a UK resident for less than three years and have bad credit then you may struggle to find a company willing to lend you the money to buy a car. If you do find a bad credit car finance company willing to accept such circumstances, be prepared for sky high interest rates.
- Affordability – Lenders have a responsibility to treat customer fairly and to act responsibly when making decisions to lend. With this in mind, lenders operating at the bottom end of the market, often referred to as deep subprime, are likely to carry out an income and expenditure assessment. This helps them to better understand you current financial situation and ability to maintain a schedule of repayments.
4. How much can I borrow with bad credit
When looking to buy a car on finance with bad credit it’s important to have realistic expectations. If you are looking to secure a £10000 new car loan with bad credit, the chances are you will be disappointed.
Despite the fact that some online bad credit car finance calculators allow you to select up to £75000, approval amounts for subprime lending usually run from £3000 to £7000.
This is adequate for a used car, but often rules out the possibility of buying a new car.
That said, there are some companies willing to lend as much as £15000 to bad credit customers, which could give you the option of a new car.
The amount you are actually able to borrow will depend largely on an assessment of your ability to maintain a repayment schedule.
Also, some lenders will only fund an amount that would equate to your monthly repayments being no greater than 30 per cent of your disposable monthly income.
5. Beware of representetive APR’s
When a lender, broker or even a dealer provide an online calculator or finance example for bad credit car finance, the APR quoted is ‘representative’ and therefore not necessarily the rate you will be offered.
As set out by the FCA, the definition of a representative APR is the rate of interest that 51 per cent of applicants will be offered, pending approval, of course.
The rate is usually calculated based on sales to customers over the previous 12 months.
The remaining 49 per cent of people will most likely be offered a higher rate, but some may be offered a lower one.
Generally speaking bad credit car finance interest rates can vary from 22 per cent to a whopping 62 per cent, although high, it’s considerably less than the 177 – 497 per cent once offered by, the now defunct, Yes Car Credit
As an example if you were to borrow an amount of £7000 over 5 years and accepted an APR of 21 per cent, you’d repay a total of £10944.60, where as if it where on an interest rate of 62 per cent, the total amount repayable would be £22,810.31, that’s more than three times the value of the car.
6. Maximum vehicle Age, Milleage & Other Restrictions
Lenders often stipulate the maximum age and vehicle mileage for those looking to buy a used car with bad credit.
Some will also impose restrictions on where you can and can’t source a car from.
- Vehicle age – Most bad credit car finance lenders will only consider financing cars that are no more than five years old, but some will stretch to seven.
- Mileage constraints – In addition to restrictions imposed on vehicle age, specialist lenders will often stipulate that a car must have clocked up no more than 80,000 – 100,000 miles.
- Sourcing a car – Lenders will generally only allow you to buy a car from a franchised or independent garage that is authorised to offer consumer credit under the FCA regime. Unfortunately this means you may be unable to secure car finance to buy a car from a private seller.
7. Check your credit report before applying
Despite some lenders claiming to offer bad credit car finance with no credit check, the reality is that all lenders will carry out a search with at least one credit reffrence agency prior to finalising a credit agreement.
With this is mind, you should request a copy of your credit report prior to making an application, especially if you have recently been declined car finance or any other form of credit.
There are three credit reffrence agencies in the in UK, Experian, Equifax and Call Credit.
By law you have the right to request a statotary one-off copy of your credit report via each of these, it won’t include a score, but it will show you any financial records that have been recorded against you.
A one-off fee of £2 applies for each of the agencys that you request a free copy from.
Checking your credit report prior to making an application for car finance with bad credit gives you the oportunity to pick up on any potential errors, these can then be disputed via the finanical instituation whom recorded the record in question.
Failing that, via the credit refference agency themselves.
For more information on credit reports, what to look for and how to dispute a record, see this guide.
8. Those with financial difficulties should express caution
Although the idea of buying a new car may sound good in principle, if you have bad credit, the reality of higher than normal repayments and a limited choice of vehicles offered by bad credit car dealers means it’s not for everyone.
Before commiting to a bad credit car finance deal you should consider the alternatives, one being the purchase of a low value run around car, though reliability may be compromised, depending on your circumstances it might be your best option.
Don’t apply for finance if you’re experiencing financial hardship
If you are experiencing financial difficulty, taking out additional credit of any kind will most likely make things worse.
If in doubt you should consult the Money Advice Service, set up by the Government, they provide free and impartial financial advice.