It is difficult to envisage life without the use of a car. Of course, if you live in a city with great public transport, it might be feasible to get by without a car, but for most of us a car is essential for our everyday lives. That is fine if you can afford to buy a car either with a loan or cash, but what if you have a bad credit history that makes a car loan unavailable? Luckily, help is at hand, as we explore in this article.
Assessing your credit rating
Your credit score is a vital component of your financial health, which is assessed whenever you apply for a loan or credit. An entire credit rating industry has evolved to monitor and log how people manage their financial affairs particularly if it involves borrowing money either via a credit facility such as a credit card or via a bill issued by a company.
These credit rating agencies calculate credit scores which assign a score summarizing how well you have managed your financial affairs. Should you fall behind with loan payments or leave a bill unpaid, it is very likely that this will be recorded by a credit rating agency which will lower your credit score accordingly.
The worse your credit history is, the lower your credit score, which can make it difficult, or even impossible, to receive a loan in the future. Therefore, it is important to maintain as good a credit score as possible, or find ways to improve it, however life can sometimes be challenging, and debts can arise, and bills be left unpaid.
Car finance options for those with a bad credit history
Conventional lenders such as high street banks generally require a good credit score from those seeking a loan, so someone with a bad credit score will have to look elsewhere to borrow money to buy a car. There are a number of options to consider, however.
Borrowing from friends and family
When you find just the right car and need to arrange payments as soon as possible, it is tempting to ask a family member, or a friend, for money. There will be no long-winded loan application forms to fill in, and no credit checks, and they may even charge a low interest rate, if they agree to loan you money.
That all sounds good, but there is a huge catch. What happens if you fail to pay back the loan or miss an installment? You won’t be upsetting someone in a bank call centre. You will be upsetting someone in your family, or a good friend. This could damage your relationship with these important people, and it simply may not be worth creating these difficulties for the sake of borrowing money, even if it means that you can buy that great car.
Payday loans
Payday loans have their uses but are designed to provide short-term borrowing to tide you over until you receive your salary or wages at the end of the month. Interest rates are very high, even though these loans are tightly regulated and have rate caps imposed on them, because they are designed to be short term loans.
As you usually own a car for years, you need longer term finance that charges far lower interest rates than offered by payday loan lenders. For this reason, it is wise to avoid using a payday loan to purchase a car – the interest that you will pay will accumulate alarmingly and is likely to get you deeper into debt.
Car dealerships offering car finance
Car dealerships have access to various loans and often have experience of arranging car finance with poor credit histories.
As car dealers are keen to sell you a car, they will work hard to negotiate a part exchange deal for your existing car, and to cover any shortfall by arranging a loan, even with a bad credit score. The application process will be quick and streamlined and a decision is very likely to be made there and then about your suitability for a finance deal.
You will be buying your car and arranging finance in the same place, which is far more convenient than browsing the web or hitting the phone to find comparable loan deals. Interest rates will vary according to your circumstances and credit score, so if your do have credit impairment, you will have to pay a higher interest rate, unfortunately.
As with any finance deal, you do have to be careful, of course. Every industry has its bad apples and car dealers are no exception, so it is important to read and understand the terms and conditions of your car loan and to fully understand what the interest rates will be and how much it will cost per month.
Final thoughts
As we’ve seen, owning a car is often important for everyday life. It can enhance your social life and be a great asset. They are expensive, though, and secondhand cars have been appreciating in value with the recent problems in obtaining new cars, so car finance is often required to facilitate buying a new or used car.
Those with bad credit scores can struggle with obtaining car finance, but help is at hand from various lenders, although it would be wise to ask about car finance from a car dealership, who will have various loans available even if you have a problematic credit history.