Car finance agreements are incredibly useful solutions for spreading the cost of both new and used vehicles. Like any type of finance, when you apply for car finance, lenders will do a review of your credit history to assess whether you are eligible for additional credit.

So, can you get car finance with bad credit? In this guide, we’ll take a closer look at how bad credit can affect buying a car on finance, what you can do to improve the likelihood of getting accepted and what you should do if you get declined.

How bad credit affects buying a car on finance

Lenders use your credit score to determine your credit risk. A low credit score can signal to a lender that you are at risk of not making payments. They may decline your application for car finance or charge you a higher interest to reduce the risk.

Bad credit usually means that you have a poor history of managing credit. This can include things like late payments and if you break the terms of a contract. Car finance lenders check your credit score through what is known as a soft or hard credit check. It is important you understand the differences before making a car finance application.

Hard vs soft checks

Soft credit check

A soft credit check, also known as a ‘soft search’ is when a company takes an initial look at certain information on your credit report. This enables them to give you a rough idea about whether your potential application would be successful. Soft credit searches have no impact on your credit score.

Hard credit check

A hard credit check involves an in-depth review of your credit report. This is usually only done when you submit a full application. This can impact your credit score, particularly if you have several hard searches in a short space of time. With this in mind, you should avoid making multiple hard searches frequently.

Can I get car finance with bad credit?

Yes, it is still possible to get accepted for car finance with poor credit. You may find it more difficult to get approved, and some lenders may charge higher interest as they will see you as more of a risk. If you have bad credit, you should be realistic with your budget and only look to finance a car with manageable repayments.

What credit score do I need to buy a car on finance?

There is no minimum credit score required for a car finance application. Every lender is different and they each follow a unique set of criteria when determining your eligibility. Whilst some focus on your credit score, others may take a more personalised approach when deciding on your eligibility.

One thing is for certain. The higher your credit score is, the more likely you are to get accepted for car finance. You’re also more likely to be offered a more reasonable level of interest and better terms. Before applying for a car finance agreement, it can be a good idea to check your credit score.

There are lots of free online tools to help you do this (Experian, Equifax, Credit Karma and others), and it can help prepare you for the potential outcome.

Can I get car finance with no credit history?

It is possible to get car finance with no credit history. However, you will likely find it harder as not all lenders will accept you. If you do get accepted for car finance with no previous credit history, you will likely pay a higher interest rate. If you have no credit history and are struggling to get approved for car finance, you could try:

Using a guarantor

Some car finance companies will allow you to use a guarantor for your finance agreement. Your guarantor would then be responsible for making the repayments if you were unable to pay them yourself.

Find a car finance lender who works with no-credit applicants

Some lenders on the market do offer finance specifically for those without a credit history. Before committing to a car finance agreement, you should always conduct your own research and collect a few quotes before making a final decision.

Find another way to fund your car

If you’re struggling to find a lender with reasonable terms, you may want to consider private funding through a bank loan or credit card.

It’s worth noting that not all dealers will accept credit card payments. This is due to the card handling fee for taking this type of payment. So, it’s always worth checking with the dealer – if you’ve identified a specific vehicle – about the payment methods they accept.

Which car finance is best for bad credit?

Some lenders offer specialised car finance for those who have a low credit score or no credit history. There are various types of car finance, each offering different payment structures and terms. The most common types of car finance are:

Personal contract purchase

With personal contract purchase (PCP) car finance, you will pay an initial deposit followed by fixed monthly payments. At the end of the agreement, you will have the option to make a balloon payment to keep the car, exchange the car for another one or return the car.

Find out more about PCP car finance

Hire purchase

Hire Purchase (HP) car finance allows you to spread the cost of a vehicle through fixed monthly payments after paying an initial deposit. Unlike PCP car finance, you do not need to make a balloon payment to keep the car but you may need to pay a small “option to purchase” fee.

Find out more about HP car finance

Conditional sale

Conditional sale agreements (CS) work in a very similar way to HP car finance. After paying an initial deposit, you will pay for the vehicle through fixed monthly payments. At the end of the agreement, you will own the car without having to pay any additional fees.

Find out more about CS agreements

Whether you get accepted for car finance will depend on the lender, rather than the type of car finance you choose. Before making an application, you should always shop around to explore the best options for you.

What should I do if I’m refused car finance due to bad credit?

If you have been refused car finance, it can be disheartening. Before going ahead and making any new car finance applications, you should first try to understand why you have been declined the finance.

Using an online credit checker is a good way of highlighting the cause of this. Alternatively, you could ask the finance company if they can give you further information on why your application was declined.

How to improve your credit score for car finance

Check your credit report

The first step to improving your credit score is checking your credit score. It can be helpful to know where you are currently at and how much room for improvement there is. Many online credit score checkers can help you identify the cause of the issue. Some will even give you tips and guidance on how to improve it.

Continue paying your existing bills on time

One of the best ways you can improve your credit score for car finance is by continuing the pay for any existing bills on time and in full where possible. Paying existing bills on time proves to lenders that you are capable of keeping on top of payments. This makes you more likely to be accepted for credit in the future.

We know that this is easier said than done, however, it will have the biggest and fastest impact on your credit score. Finding a way to suitably manage your debt will always be the best approach.

Limit applying for new loans or credit cards

Applying for loans and other types of finance will require a hard credit check. This will affect your credit score and remain on your report for a couple of years.

If you have lots of hard credit checks in a short space of time and have been declined for a loan, the lender will see this and they may be less inclined to offer you credit.

If you must have a credit check, try to keep these ‘soft’ and avoid any hard credit checks until you have built your credit score back up.

Get a credit card if you need to build a credit history

If you need to build a credit history, applying for a credit card is a great way to do this, provided that it is used wisely. Credit-builder cards typically come with low credit limits and a high APR (Annual Percentage Rate). However, these can be used to build your credit score in a manageable way.

Much like a standard credit card, you should try to pay off your credit card in full every month. Avoid any late payments which could harm your credit score further.

Check to see if someone you are financially linked to has bad credit

If you have a mortgage or a joint bank account with someone else who has a bad credit history, this can affect you. Even if you’re applying for credit separately from them. If you no longer have a relationship with this person, you can apply for a ‘notice of disassociation’. This is a formal request to remove the individual from your credit file.

Register to vote

When you register to vote, these details are recorded on your report. This helps finance lenders confirm information such as your name and address. This helps to improve the security and confidence that lenders have in you, leading them to be more inclined to offer you finance.

Frequently asked questions

Can you finance a car for someone else?

Applying for car finance on behalf of someone else is known as ‘fronting’ or ‘accommodation finance’ and it is illegal. Similarly, it is not possible to switch a car finance agreement over to someone else.

If you are looking to apply for finance with someone else, you can make a joint car finance application. This will mean you both have joint responsibility for the car and the repayments.

Does a car loan build credit?

If you pay your monthly repayments in full and on time, then this can help to build your credit score. However, if you fail to pay your repayments this can harm your credit score, reducing your chances of acceptance in the future.

How much does your credit score drop after buying a car?

After financing a car, you may find your credit score dips by a few points. This is only temporary. Providing you make your monthly repayments in full and on time, your credit score will return to normal and improve over time.

Can you get car finance with a CCJ?

Yes, it is possible to get accepted for car finance with a CCJ (County Court Judgment). However, lenders may be more hesitant to lend you the money. In some cases, you may be refused or have to pay a higher interest rate to secure the finance.

Steve Edwards
A certified car nerd who has been creating car content since 2015, Steve is much happier talking about used cars under £15,000 than the latest hypercar. He’s been advising friends and family on their next used car purchase for as long as he can remember – handy experience for his current role in charge of content at MOTORS. As a father of two young kids who covers a lot of miles, he tends to value safety, practicality and comfort above all else, so he has a soft spot for massive SUVs and premium estate cars.
Article published February 27th, 2024