Bad credit car finance

What are your options if you have a poor credit history?

Accessing finance to pay for a vehicle can be tricky for those with a bad credit score, who are deemed more of a risk by lenders. This guide looks at whether getting car finance with bad credit is still possible (spoiler alert: it is), but crucially we'll help you to decide whether doing so is a good idea, plus we'll detail some of your options.

Who's this guide for? This guide is for anybody with a poor credit history who's considering applying for car finance.

We've lots more help if you have a bad credit score, no matter the reason:

How to check your credit report for free | How to improve your credit score

How to build your credit history | Credit cards for bad credit

Can I get car finance with bad credit?

1736377772

Although it can be difficult to secure car finance with a bad credit history, it is possible. However, you'll almost certainly face higher interest rates and therefore higher costs because of this – we've more on the pros and cons of bad credit car finance below.

If you have a poor credit history, rather than launching into a costly car finance deal, it's important to consider your other options first. You could instead refocus your efforts on improving your credit score for a period of time, and then looking to borrow later on, by which point you should be able to access better rates.

Alternatively, if you're struggling with your finances, see our Debt help guide for ways to improve things. That could be by creating a budget and looking at what benefits you may qualify for, or seeking support from a third party such as a debt help charity – whatever steps you take, it's crucial you do something.

However, if you need a car, and you feel that car finance is your only option, we'll talk you through what you need to know regarding bad credit car financing, including how you might be able to keep your costs down.

What are the different types of car finance available to those with a bad credit score?

If you have bad credit you'll have the same car finance options available as anybody else – you just may find it harder to be approved for borrowing.

Broadly speaking, there are five main car financing options – assuming you don't have significant savings to use. These are:

  • A 0% credit card. Make a new purchase on one of these cards and the lender will charge no interest for a set period – but interest kicks in after this.
  • A personal loan. These let you borrow money at a fixed interest rate, to be paid back in fixed monthly instalments over a fixed term.
  • Hire Purchase. A Hire Purchase agreement allows you to hire a car and then purchase it once you've paid off the loan.
  • Personal Contract Purchase. This form of car finance is similar to Hire Purchase, but here you have the option to buy the car at the end, though you don't have to.
  • Car leasing. Also known as Personal Contract Hire or PCH, car leasing lets you rent a car for an agreed period and pay back a set amount each month.

The table below shows you at-a-glance how all of these options compare against each other, with the links taking you to our full guides on these ways of borrowing.

Comparing ways to finance a car purchase

Finance type Typical length of agreement? Initial deposit required? Who owns the car? Mileage restrictions?
0% credit card Up to 25 months No You (though you'll still need to pay back what you borrowed) No
Personal loan Usually 1 to 7 years No You (though you'll still need to pay back what you borrowed) No
Personal Contract Purchase Usually 1 to 5 years Yes (i) The finance company, except if you make an optional final balloon payment Yes (ii)
Hire Purchase Usually 1 to 5 years Yes (i) The finance company, until the final repayment is made, then you No
Leasing/Personal Contract Hire Usually 1 to 4 years Yes (i) The finance company, at all times Yes (ii)

(i) Generally speaking, though it's possible to get a deposit contribution from the dealer or structure a lease deal to pay nothing upfront. (ii) You'll typically agree an annual mileage limit with the lender at the start of the deal and will pay additional fees if you exceed this by the end.

What are the advantages and disadvantages of car finance with bad credit?

Advantages

  • Access a car without significant savings. Only take on car finance with bad credit if you really need a car – and not simply because you fancy the latest Tesla. If you have to borrow, bad credit car financing can allow you to access a vehicle that otherwise may have been too expensive.

  • Boost your credit. While car finance is likely to cost you more with a poor or limited credit history, making regular payments on a car finance agreement can help you to rebuild your credit over time, by showing responsible financial behaviour. However, there are other ways of doing so, without taking on such a long-term commitment as car finance – such as by using a credit card for bad credit.

Disadvantages

  • Higher interest rates. Lenders typically charge higher interest rates to those with bad credit, to offset the increased risk of them defaulting. This results in significantly higher overall costs over the life of the loan.

  • Limited options. You'll likely have fewer choices when it comes to the type of car you can buy or lease and the terms of the loan. This restricts your options and may lead to higher costs.

  • Higher down-payments. Some loan providers may require a larger down-payment as an additional security. This can make it harder to afford a car finance deal.

  • Risk of further damage to your credit score. If you struggle to repay your car finance, you risk causing longer-term damage to your credit score, making it much harder to borrow again in future.

  • Risk of repossession. Failing to make payments on a car finance agreement could also lead to your car being repossessed. This would not only have a damaging effect on your credit score, but leave you without a car, something that could put more strain on your finances.

MSE weekly email

FREE weekly MoneySaving email

For all the latest deals, guides and loopholes simply sign up today – it's spam-free!

How do I improve my chances of getting approved for bad credit car finance?

A car loan application form.

Simply having poor credit won't stop you from accessing a car finance deal. However, it does mean you need to think even more carefully about whether to take on this form of debt.

What you should be working towards is improving your credit score, regardless of whether you're planning to use bad credit car financing or not.

Here are some ways you can do just that – and so improve your chances of getting approved for bad credit car finance:

  • Use a credit (re)builder card. One of these cards can help you build a credit history, if yours is limited, by showing you can borrow responsibly. See our Credit cards for bad credit guide for full step-by-step help.

  • Register to vote. Get on the electoral roll – being on this means lenders can check your address and ID (you can opt out of the 'open' electoral register, which can be used for marketing). Register to vote at Gov.uk.

  • Always make payments on time. Use a Direct Debit to ensure you never miss or be late on a payment, even if it's just the minimum (then manually repay more on top).

  • Try not to max out your credit limits. It looks better to lenders if you're using less credit than you're technically allowed to borrow.

  • Minimise other credit applications before borrowing. Too many applications too quickly can be a negative, so space them out. For example, if you know you'll need to make a 'big' application – such as a mortgage – avoid smaller applications (such as for a credit card, or switching bank account) until after that's been accepted.

Learn more ways to boost your credit score in our How to improve your credit score guide.

Breakdown of bad credit car finance costs

726217735

It's hard to give a catch-all example of car finance costs for someone with bad credit, because of the many variables involved.

So here we'll look at the factors that affect what you pay – which will generally apply across different types of car finance – as well as some examples of the charges involved. The total cost can give you a rough idea of how much bad credit car finance could set you back.

  • The car's price. This is the initial figure you borrow to buy the car – let's say £12,000.

  • The interest rate. Here, expect a higher interest rate than somebody with a good credit score – typically anywhere between 15% and 30%. Let's say you agree to a car finance deal with 20% interest.

  • The loan term. This is the period in which you'll repay the loan – usually over a set number of months or years. You may be offered a longer loan term to reduce monthly repayments because of your financial situation. However, this will likely result in higher interest over the life of the loan. We'll go with a four-year loan for our example. 

  • Any additional fees and charges. You could face extra costs such as admin fees and/or early/late repayment penalties.

To borrow £12,000 over four years at 20% APR would cost you around a whopping £5,530 in interest – nearly half the cost of the car itself – with monthly repayments of about £365.

With such hefty interest costs it's crucial that you weigh up whether bad credit car finance is right for you – and that you consider working towards improving your credit score as a first step instead.

How do I keep costs down?

Taking out car finance with bad credit is likely to cost you more than for someone with a good credit history. Think twice before taking on such a big commitment, but if you are set on it, and you've carefully planned and budgeted, here are some ways you can keep your car finance costs to a minimum:

1697077897
  • Improve your credit score. Yep, we've covered this already, but it's important to make this point again. While not an immediate solution, working on improving your credit score can help you to get lower interest rates in the future. See more on improving your credit score above.

  • Compare your options to find the cheapest. Don't settle for the first car finance deal you find. Work out which form of car finance would be best for you, and then compare rates and terms from multiple lenders to find the most suitable agreement.

  • Negotiate, negotiate, negotiate. Can you haggle on any of the costs involved? For example, can you get something knocked off the car's price?

  • Opt for a used car. Choosing a used car instead of a brand new one can mean big savings.

  • Try a shorter loan term. Longer loan terms may seem attractive because of the lower monthly payments, but they often will cost you more. Opting for a shorter loan term can help you save money and clear the borrowing faster.

  • Put down a larger deposit. Putting down a bigger deposit where possible reduces the amount you need to borrow and can result in lower monthly payments and interest costs. So save up for a larger deposit if you can before applying for car finance. Again, be careful not to overstretch yourself financially.

  • Avoid add-ons and extras. Be cautious of being upsold additions such as extended warranties and/or insurance. Although these products may provide peace of mind, they can also increase the total loan cost. Think carefully about whether you need them or not.

Is car finance a good idea with a poor credit rating?

Getting car finance with bad credit is definitely possible. And for some people it may be a necessity – after all, having a car is essential for daily living for many and buying one upfront can be unaffordable.

However, it's important to tread carefully – lenders may try to take advantage of your financial situation and charge you high interest rates, or offer you a loan over a longer period, piling on greater overall costs. Taking on this amount of debt can also worsen your financial situation, among other negative outcomes

And as to whether it's a good idea: generally speaking, taking on a large amount of debt with a bad credit history for something that might not be completely necessary is unlikely to be a good idea. It would be more sensible to focus your efforts first on restoring your credit score, before attempting to borrow.

If you need a car and feel you have to borrow with a bad credit history, this guide should give you a better understanding of the implications of doing so, and help you to keep your costs down – though they will always tend to be higher because of your bad credit record.

Bad credit car finance FAQs

  • Is it possible to refinance a car loan with bad credit?

    Yes, it is possible to refinance, or switch, your car loan. However, it's generally harder to do than refinancing with good credit and you may not get the terms you want either.

    By following the tips outlined in this guide – particularly those around improving your chances of being accepted for a loan in the first place – you'll stand a much better chance of refinancing your car loan. 

    Also, read our Cut existing loan costs guide, which has a calculator which can tell you if it's worth switching loan.

  • What happens if I miss loan repayments?

    If you miss a payment, the lender will probably first contact you to find out why. Do so multiple times and it'll mark you 'in default', which will appear on your credit file and stay there for six years, making it a lot harder for you to get other credit.

    Always contact the loan provider if you're struggling to make your repayments – ideally before the next one is due. If it's aware of your issues, the lender may help you – for example, by offering to extend the loan term, adjust your monthly repayments or temporarily defer instalments. While this can help short-term, it can mean increased costs long-term, so make sure you fully understand the implications of doing this.

    The lender can take legal action if you don't let it know and continue to miss payments. This could involve anything from getting bailiffs to repossess your car (or other assets you own to the value of it), or in the worst case scenario, request that the court make you bankrupt over the debt.

  • Can I pay off my bad credit car finance loan early?

    You can pay off your car finance loan at any point. Some loan providers will let you do so without penalty, but most will charge you a fee for the privilege – typically one or two months' interest. 

    To settle your car finance loan early, contact your lender and request a 'settlement figure'. This is what you'll need to pay to completely clear the loan.

  • What credit score is too low for a car loan?

    You won't be able to get a car finance deal without passing a credit check. No reputable lender would just give you a loan – providers want to feel confident that you'll make the repayments.  

    That said, there is no definitive minimum credit score that ensures you'll be approved for a car loan, and different providers have different criteria.

    In some cases, you may be able to use an eligibility calculator to check your chances of getting a loan, before you apply.

    However, the strength of your credit score and chances of getting car finance are undeniably linked – so securing a car loan is undoubtedly more difficult with a lower credit score. 

MSE weekly email

FREE weekly MoneySaving email

For all the latest deals, guides and loopholes simply sign up today – it's spam-free!

Spotted out of date info/broken links? Email: brokenlink@moneysavingexpert.com