Understanding car finance can be hard, especially if you have less-than-perfect credit. But there are options to help people who have had trouble with credit before. This article talks about the good things about car finance, especially for people with poor credit. It explains things like hire purchase agreements and helps make the financial terms easier to understand.
What Car Finance Involves
Car finance for bad credit helps people who have had money problems get a car without paying the full amount upfront. These options don’t just look at your credit score, making it easier for more people to get a car.
How Car Finance Works
Getting car finance can feel overwhelming. But there are options like hire purchase agreements, where you pay a set amount each month for a fixed period. Once you’ve made all the payments, the car is yours. This option makes it easier to manage payments without needing a large deposit upfront.
Key Points About Car Finance:
- 1. Application Process: Car finance companies that work with people who have poor credit often use real people to review applications, not just computers. They understand different situations, like being self-employed or receiving benefits, which can make it easier to get approved.
- 2. Approval Criteria: Lenders who offer bad credit car finance don’t only focus on your credit score. They also look at your current finances and how steady your income is to decide if you can afford the loan.
- 3. Improving Credit: If you make your car finance payments on time, it could help improve your credit score. This is a helpful way to rebuild your credit, even if it’s not great right now.
Different Types of Car Finance Options
- Hire Purchase (HP): You pay a deposit first, then make regular monthly payments. Once you’ve paid everything, the car is yours. This could be a good option for people with bad credit because the repayments are clear and structured.
- Personal Contract Purchase (PCP): This option has lower monthly payments. At the end, you can either pay a final amount to keep the car, return it, or swap it for a new one. It’s a flexible choice if you’re unsure about long-term ownership of the car.
- Personal Loans: These are better for people with a good credit score who want a simple loan to buy a car.
Strategies to Improve Your Credit Score
- Check Regularly: Keep checking your credit report to catch any mistakes that could harm your score.
- Pay on Time: Always pay your bills and debts on time. This shows you’re responsible with money and helps improve your credit rating.
- Reduce Debt: Try to lower your overall debt. This makes you look better to lenders and can improve your credit score.
- Register to Vote: Being on the electoral roll helps confirm your identity and address, which can also boost your credit score.
Choosing the Right Car Finance Option
Think about how much you can afford to pay each month, how long you want the loan to last, and the lender’s reputation. Car finance calculators can help you work out your monthly payments, making it easier to pick an option that suits your budget.
Making the choice to purchase a car using car finance can be a difficult task. Does the car finance jargon put you off buying a new car on finance? We have put together a list of commonly used terms that you will come across when looking to purchase a new car on finance.
Fixed Interest Rate Loans: This type of car loan cannot be changed by the customer or lender over the agreed term. So even if the Bank of England change the base rate your loan rate will not increase with it.
CCJ: County Court Judgements are usually issued if you have defaulted on any previous debt payments. If you have a CCJ it will usually impact your ability to obtain credit and your credit score.
Credit Score: This is a score based on previous bill and credit repayments. It is used to predict how likely you are to pay back any future loans or credit commitments and make those payments on time.
Credit Report: This is a history of your credit information and is stored with a credit reference agency. It also contains how you have managed your credit commitments in the past and electoral information on your address, as well as any credit checks that have been made.
Credit Reference Agencies: If you take out a loan or credit commitment then you agree to the lender to perform a credit rating check. They will check your credit history through a credit reference agency such as Equifax or Experian. You can also view your own credit history by visiting one of the agency’s websites.
Debt Consolidation: This is a loan made up of combined debts that are spread across a number of credit commitments such as loans, store or credit cards to create one fixed regular payment.
Individual Voluntary Arrangement (England): An individual voluntary arrangement (IVA) is a formal arrangement to pay an agreed amount off your debts over a shorter period. Any debt left at the end of the IVA is written off. IVAs can be set up in a number of different ways, either as a monthly instalment plan over a fixed term (normally five years), or a short term arrangement if you have a lump sum to offer. Some IVAs are a mixture of both. An IVA can be a useful alternative to bankruptcy if you are worried about possible risks to your job or home.
Joint and Several Liability: This is a debt that is owed by joint borrowers such as a partner where you are both liable for repaying the full balance. If the other party declared themselves bankrupt or even disappeared then you could be liable to repay the full amount.
Representative APR: An Annual Percentage Rate is used on lending such as mortgages, loans and credit cards. An APR’s purpose is to demonstrate the total cost of borrowing over an average year and interest cost, charges and any upfront fees. This also makes it easier to compare car finance deals in the market.
Settlement Figure: This is when you choose to repay part or all of your car loan earlier than your term length. If you choose this option then your monthly payments will be reduced but the term length will remain the same. If you settle the whole amount of the car loan early you may have to pay interest on either the amount repaid or the amount of interest depending on the length of your loan.
Term: The agreed period of time (usually in months) over which you have to make repayments until your car loan is repaid.
Credit Limit: This is the highest amount of credit that a car finance company will lend to you at the time. It is in your best interest to stay within the set credit limit so as not to incur increased interest rates or charges that may affect your future requests for credit.
Direct Debit: An arrangement where the bank releases money from your account to pay bills automatically. The organisation you are paying can change the amount of a direct debit, but you are told in advance how much it will be. If you set up a direct debit to pay household bills you usually receive a discount, and it means that you don’t have to worry about sending off a cheque each month.
Standing Order: an instruction to a bank by an account holder to make regular fixed payments to a particular person or organization.
Interest Rate: The percentage that is paid in interest on savings or loans. A savings account that was offering 8% interest would give you a better return (more money) than one that was offering 5%. Similarly borrowing money at 22% would cost more than borrowing at 18%.
Net Pay: The pay you actually get after tax, national insurance and other deductions have been taken off. Also known as “take-home pay”.
Conclusion
Car finance options for people with bad credit can help you own a car and improve your credit score at the same time. By understanding your choices and how to boost your credit, you can make smart decisions that fit your financial goals. Whether you choose hire purchase or another finance option, the most important thing is to find a solution that works for you and supports your financial well-being.
