If you’re in the market for a new car, you may be wondering how your credit score will affect the car buying process. When it comes to buying a car with cash, there is no approval process or any need for a credit check to be performed as you won’t need to take out a loan. This can be a good option for those with bad credit but having a low credit score shouldn’t stop you from getting a car loan. It’s a common misconception that bad credit makes it impossible to get a car on finance but there are a few ways in which you can help to increase your chances.
What is a credit check?
A credit check is when you agree to have a lender or finance company take a look at your credit report. Usually, before you can be accepted for any form of credit or finance, lenders will require you to undergo a credit check. There are two main types of credit check, and they are a hard search and a soft search. A hard search is when a lender gets access to your full report and everything listed on it, included the outcome of any previous finance applications. Multiple hard searches on your credit file in a short space of time can actually have a negative impact on your score so it’s worth keeping in mind. Many lenders now use a soft search credit check though. A soft search only allows lenders to see part of your credit file and there’s no credit impact either so it can be much better for your credit score when you’re shopping around for car loans.
Can you get a car without a credit check?
If you’re looking to buy a car with cash, then you can benefit from no credit check being performed on your credit file as there is no need to. Some car finance companies may be offering car finance approval with no credit check, but this is something you should be wary of. No car finance lender can guarantee finance and it usually goes against the rules of responsible lending. Companies offering car finance with no credit check may impose high interest rates or need a large deposit to help secure the deal which may not be the most cost effective way of getting a car.
How does credit score affect car finance?
Your credit score can affect your car finance in a number of ways. First, a credit check will be performed on your credit file to assess the level of risk. The initial credit check helps lenders to get an idea of how you’ve handled credit in the past and the likelihood of you paying your loan back on time and in full. It can be possible to get a car with a poor credit history, but it can make it harder when it comes to getting approved. Some lenders may simply refuse your application and taking some time to instead improve your credit score before applying could be a better option.
If you do get approved for finance with a low credit score, it can also affect the interest rate offered by some finance lenders. Usually lenders reserve their best deals for people with good or excellent scores. This is because they usually have a long history of meeting repayments on time and in full and can handle their credit responsible. Applicants in this situation are less likely to default on their loans or finance in the future.
How to increase your chances of getting a car on finance with a low credit score?
Whilst it can be hard to get approved when you have bad credit there are a few factors you should consider to help raise your credit score and also try get you a better deal.
- Reduce any current debt you owe.
If you currently have high levels of debt, it can be negatively impacting your credit score and also make it harder for you to take on anymore finance or credit. Where possible, you should try to reduce any current debt first and pay off as much as you can before you start applying for finance.
- Make payments on time.
One way to prove your creditworthiness is to make any payments on time and in full for a number of months. By showing you can handle your credit responsibly, you are not only increasing your credit score but also creating new financial habits to keep on top of your payments.
- Build a credit history.
In some cases, you may find it hard to get finance when you haven’t had any evidence of previous borrowing. Many people assume no credit is a good thing, however, lenders can’t predict what type of borrower you will be if you’ve never had finance before. You can start as small as getting a mobile phone contract in your name and meeting the payment each and every month via direct debit to help build a credit history.
- Save for a deposit.
Having a deposit to put forward for car finance could help you to get approved. A deposit contribution is a good thing as you won’t have to borrow as much from a potential lender, and it helps to reduce your loan amount. A smaller loan can be more manageable and can also reduce how much you need to pay a month.