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If you want to buy a car, you can either pay for it in full or choose from a number of car finance options.
Car finance can be more flexible and affordable than buying your vehicle outright, but there are many factors to consider before taking on this type of debt.
This is particularly true if you’re worried about your credit score or missed payments in the past. If you’re wondering what credit score is needed for car finance and you’re eager to boost your chances of borrowing money, read on.
First thing’s first, there’s no universal credit score that’s recognised across the whole lending industry. In fact, you’ll usually have at least three credit scores and each one can be very different.
Credit scores are created by credit referencing agencies. The three biggest agencies in the UK are Experian, Equifax and TransUnion.
Each one will have a separate credit report and credit score for you, even though they’ll all be based on your financial circumstances and borrowing habits.
When lenders decide whether to approve your request for credit or not, they’ll have a look at your credit report to determine what kind of borrower you are. You don’t need a specific credit score for car finance, but the higher your score the greater your chances of getting the credit you want.
Your credit report is filled with information about your previous debts and payment history.
Whenever you borrow money, lenders and creditors give this information to the credit referencing agencies.
Your credit report will hold details of any personal loans, phone contracts, car loans, credit cards, store cards, mortgages and overdrafts you’ve had in the past or hold currently.
If you’ve ever had a debt that’s been passed to a collections agency, this will be viewable on your report, as will any County Court Judgements (CCJs), Individual Voluntary Arrangements (IVAs) or bankruptcies.
Potential lenders won’t see any soft searches that have been carried out on your report, but they will see hard searches. Hard searches appear when you apply for a type of credit, whether you go on to be accepted or not.
Car finance allows people to buy or lease a car. It’s similar to a loan and you’ll usually be expected to pay back the money you borrowed in set amounts over an agreed period of time. You’ll normally be charged interest too.
Once your car finance has been approved, you’ll get to take your car home and pay for it gradually. The amount you’ll pay each month will depend on a number of factors such as:
The cost of your car
The term/how long you want the agreement to last
Your interest rate
Your credit history
There are four main types of car finance in the UK, so it’s worth comparing them to find one that works best for you.
Hire purchase means you’re hiring the car from the lender until you’ve paid it all off. The loan is secured against the car, meaning it’s not officially yours until you’ve finished paying for it.
You’ll usually have to put down a deposit. The more you pay upfront, the lower your monthly payments will be. Putting down as much as you can is a smart way of reducing the amount of interest you’ll pay.
If you want to settle a hire purchase agreement earlier, you’ll be given a settlement figure. If you pay the settlement figure, you’ll no longer have the debt and the car will be yours. This is another way to save money on interest.
If you fail to make your repayments, the car may be taken by the lender.
A personal contract purchase is similar to hire purchase, but at the end of the fixed term you’ll have three choices:
Return the car
Use the equity you’ve built up as a deposit for your next vehicle
Own the vehicle by paying what’s known as the ‘Guaranteed Minimum Future Value’
Most people who use this type of car finance return the car and use its equity to get a new one. This option is particularly beneficial for those who like to have a new car every few years, but it can work out more expensive than other options.
There will be a clause in your agreement which outlines the maximum annual mileage. If you exceed this figure or the vehicle is damaged when you return it, you may be charged by the lender.
Personal contract hire is a long-term rental agreement. You’ll pay a deposit to the car dealer and make monthly payments to use the car. There’s no option to purchase the vehicle once the agreement is over.
A personal or unsecured loan can be used to buy a car. These options allow you to borrow a set amount of money over a fixed amount of time. You will own the car as soon as the dealer receives the money from the lender, but you’ll need to pay the money back in monthly instalments and interest.
The loan is not secured against the vehicle itself. This means you can sell it at any time.
If you can’t pay back your personal loan, your debt could be passed onto a collections agency and in extreme cases, you could be taken to court.
Try not to focus too much on your credit score, and instead think about your credit report as a whole. Lenders aren’t overly concerned with the final figure you’ve been given. Instead, they usually want to look a little deeper to assess your financial behaviour and attitude to debt.
They want to see that you’re capable of paying back the money you owe.
Your credit history doesn’t have to be immaculate, but if you’ve missed payments or you’ve had serious debt problems in the past, potential lenders will take this into consideration.
If you have a low credit rating or you’ve struggled with debt in the past, this doesn’t necessarily mean you won’t be able to get a loan. Some lenders specialise in offering loans to people with less than perfect credit histories, though their interest rates do tend to be higher.
Another option could be a guarantor loan. Guarantor loans are popular among people who want to take out an agreement, but they have a poor credit rating. To access this type of loan, you’ll need to find a relative or friend who’ll pay off your monthly payments for you if you were unable to pay them yourself.
Although there is no specific credit score needed for car finance, you can improve your chances of getting approved by building your credit score in the months before you apply.
By tidying up your credit report, you can also increase your chances of getting a good deal with a lower and manageable interest rate.
Here are a few ways you can impress potential lenders:
This may surprise you but registering to vote can have a positive impact on your credit report, regardless of whether you turn up at the polls on election day. When you register to vote, this makes it easier for credit referencing agencies and lenders to confirm your details.
Some people swear by carrying a balance on their cards but did you know this can actually harm your credit score? Instead of carrying money over from month to month, pay off your debts on time and in full. This helps to paint you as a trustworthy borrower who can manage your debt.
Have a look through your credit reports to make sure old addresses are correct. If you notice any mistakes, don’t hesitate to get in touch with the credit referencing agencies to request a fix.
By keeping your accounts as tidy as possible, you can boost your chances of getting the car finance you need.
