Bad credit car loans are available from various direct lenders, but they are always concerned about your repayment capacity. Undoubtedly, your income plays a vital role in boosting your chances of being accepted, but your past payment behaviour is equally crucial. A less-than-perfect credit score will call your creditworthiness into question. It is likely that you abdicate responsibility because of emphasising other expenses. Therefore, just because your financial condition is sound, it does not guarantee that you will be approved for a car loan.
Subprime borrowers can apply for a car loan, but interest rates will be high. They are also subject to strict criteria. If you are looking to apply for car loans for bad credit, you can improve your chances of getting these loans approved faster.
What is a bad credit car loan?
A bad credit car loan is a loan that subprime borrowers take out from direct lenders. They are similar to personal loans as they do not require collateral, but lenders will have the upper hand on your car. It means you are absolutely free to use the car the way you want, but you cannot sell it unless you pay off the debt.
Here are the features of car loans with bad credit:
- They charge high interest rates. The worse your credit score is, the higher the interest rate will be.
- You will have limited options because not all lenders accept applications from poor credit borrowers.
- Lenders may not be able to lend a large sum. They will require a larger deposit, which is at least 20%, and yet the loan amount will be restricted.
How can you improve your chances of getting a car loan with bad credit?
You should take the following steps in order to increase your approval rate for car loans despite a bad credit rating:
- Make sure your credit score is not too low
While car loans with bad credit from direct lenders are available, lenders do not accept applications across a wide range of bad credit. First, you should check the bare minimum credit score that they want. If your score is lower than that, your application will be straightaway rejected.
Get a free copy of your credit report from all credit reference agencies and check your current score. Make sure that it does not consist of any errors. If so, dispute them. Credit bureaus take some time to get them approved.
- Put down a larger deposit
Car loans require at least 10% of the value of a car as a down payment. However, if your credit score is less than stellar, you will be required to pay down a larger deposit, at least 20%. It is recommended that you make a larger down payment because it reduces the loan-to-value ratio.
Lenders will find you less risky and will be willing to sign off on your application. A larger deposit is especially required if you are looking to purchase an expensive car.
- Consider specialist lenders
There are a few direct lenders who provide bad credit car loans. You should try contacting them because they will most likely give the nod to your application. Contact a broker if you need any help. They will introduce you to a couple of lenders whose criteria match your credit profile.
- Arrange a guarantor
Arranging a guarantor can increase your approval chances. This is because it minimizes the risk involved in loaning you money. When a guarantor enters into an agreement, they promise that they will be obligated to settle the whole debt in case you make a default. A lender could turn to your guarantor if you fail or refuse to discharge the debt. However, there are certain things that you must know before applying for a guarantor car loan:
- Lenders thoroughly run an affordability check on a guarantor, too. They must have a good credit score and a strong repayment capacity.
- If you fail to repay your debt, the guarantor will also lose their credit points. They cannot protect their credit score even if they settle the whole debt on time.
- Non-payment will affect your relationship with the guarantor as well.
While arranging a guarantor, you must ensure that they are well aware of the consequences.
- Demonstrate a stable income source
You must be able to demonstrate a stable income source to your lender. When your credit score is poor, your lender will expect you to have a higher income source as an attempt to minimise the default risk.
In order to prove to your lender that you can repay the debt, you should:
- Provide payslips
- Bank statements
- A proof of regular income
All these documents ensure that you can easily manage payments.
- Consider buying a less expensive car
Most lenders will restrict the loan amount, fearing that you will most likely default. In such a situation, you might not be able to have an expensive car renewed. Try buying a less expensive car, or consider a secondhand car.
However, you will still be required to arrange a larger deposit. Make sure that it is not less than 20%. A higher deposit will improve your chances of getting qualified for a car loan.
- Obtain prequalifying letters
You can apply for prequalifying letters from various direct lenders to know the estimated interest rates they will charge. The good thing about these offers is that you will not lose your credit score.
Getting preapproved offers will reduce the risk of being rejected at the time of formally applying for the loan. You can choose a lender who offers lower interest rates. However, bear in mind that actual rates will be higher because they are offered after a perusal of your credit file.
Common mistakes to avoid
The following table discusses some common mistakes that you must avoid at the time of applying for a car loan:
| Mistakes to avoid | Explanation |
| Ignoring your credit file | It is vital to ensure that your credit score is not lower than the minimum score that lenders accept. Sometimes, your credit report might have details of erroneous accounts. Check them and dispute any errors. Not checking your credit report before applying for car loans could result in rejection. |
| Borrowing more than you can afford | You should never borrow more than your affordability because otherwise you will fall into an ongoing debt trap. Try buying a less expensive model or a secondhand car in case your budget is small. |
| Not comparing lenders | Interest rates and repayment terms vary by lender.Use comparison websites and obtain prequalifying offers from lenders to choose the lowest possible rates. |
The final word
Car loans for bad credit can be quite difficult to get approved for. You should have a strong repayment capacity to easily have these loans signed off on. Some lenders might ask you to arrange a guarantor if your financial condition does not become stable.
Dealership financing is an alternative to car loans from direct lenders, such as hire purchase and personal contract purchase. Compare their rates and terms as well before making a decision on taking out a car loan from a direct lender. Take out a car loan only when you are absolutely certain about your repayment capacity.
