Are you looking to buy a car? You would be trying to know which loan option is actually suitable for you. There are various types of finances you can use to fund your car – personal loan, hire purchase, and personal contract purchase.
Each type of funding source is different. Hire purchase and personal contract purchase are dealership financing. However, personal loans can be taken out from a direct lender. In all financing options, you need a deposit, which must be at least 10% of the value of your car.
If you do not have a deposit, you cannot use any of the financing methods mentioned above. Which of the financing method will suit you depends on your financial circumstances and goals. If you are looking to own the car at the end of the contract, you should consider either personal loans or a hire purchase.
If you do not intend to get the title at the end of the contract, you should use a personal contract purchase. However, when you have a bad credit rating, you need to decide carefully on the financing option.
How to choose the best car finance deal with a poor credit score
Here are the ways how you can choose the best car finance deal despite a bad credit score:
- Choose a less expensive car
It is worth noting that the market price of the car can make or break it. Even though you have 10% of the value of the car as a down payment, it could still be expensive. The higher the car’s value, the higher the loan-to-value will be.
Remember that you are not just supposed to pay back 90% of the value of the car but interest on top of that. It could be more than the size of your down payment. Therefore, it makes sense to buy a cheaper car.
Use online loan calculators to find the estimated cost of debt. This can help you decide if you are buying a budget-friendlier car. If no new car model seems to fit your budget, you should try to look for a secondhand car.
They are much cheaper than new cars because a car loses its market value by 30% s immediately as it comes out of the showroom, so that you can get an even a year older car at relatively affordable prices. Since the prices are low, the loan-to-value will also be lower.
- Increase the deposit size
You need to have 10% of the value of car as a deposit size. However, if you have got a bad credit rating, a lender will want you to have a bigger deposit size. Though some lenders and car dealers can offer you guaranteed car finance for bad credit you should still try to adjust the down payment even if you have only a 10% deposit.
This is because it can help whittle down the interest rate. The higher the deposit, the lower the loan-to-value will be. This will make it more affordable for you than otherwise. Lenders do not have fixed interest rates.
They will look at your credit score, repaying capacity and deposit size. They aim to gauge the risk involved in lending you money. If they find that you are a riskier applicant, they will charge a higher interest rate.
Increasing the deposit size will lower the size of the debt. It minimises the risk of a lender, and therefore, you will likely get money at affordable interest rates.
- Extend the agreement
The term of a car loan is usually not more than 18 months. If you choose to hire a purchase or a personal contract purchase, it could be a little more or a little less, depending on the policy of a car dealer. Well, you will get to know the amount you are to pay every month toward the debt as an instalment.
If you think it is a bit expensive or a monthly instalment is more extensive, you should try to extend the loan agreement. By asking your lender to extend the loan agreement, you will be able to have small monthly instalments.
This will make it much more affordable for you to repay the debt. However, note that you will end up paying a lot of money in total. This is because, by extension of debt, the interest accrues. As far as it is about a hire purchase agreement, you can opt for interest-only payments. By the end of the contract, you will have to make a balloon payment.
- Avoid having an outstanding debt
A bad credit rating and an outstanding debt are two different things. There are chances that you can get the nod from a lender when your credit rating is not good. Still, a lender will only be willing to sign off on your application if you already have a debt to be paid off, like credit card bills or loans for bad credit with no guarantor for the unemployed.
When you already have an outstanding debt, it increases the risk of a lender. They will more likely find your case sceptical. They will probably doubt your repaying capacity, and therefore, they will charge higher interest rates.
To wrap up
Getting the best car deal with a bad credit rating is quite challenging. A rule of thumb says that your credit score should not be too bad. Further, it will help if you try to buy a less expensive car. This will reduce the loan-to-value. You can also think of buying a second-hand car.
Ask your lender to extend the repayment period as this shorten the size of monthly instalments. Last but not least, you should avoid having an outstanding debt at the time of applying for car loans.
Anna Johnson has more than 11 years of experience in direct lending industry of the UK. She is the Senior Content Editor at 24cashflow where she is leading a large team of loan experts. During her career, she has helped the loan aspirants to use the particular loans in the best way and improve their financial lives and status.
Anna Johnson is known for her in-depth research of the UK loan marketplace, as she has worked with many major lending firms in her career. During her educational phase, she has done a research on ‘Finance Fundamentals for Growing Business’.
