A bad credit rating can be an obstacle if you’re looking to take out a loan to buy a car, but it certainly isn’t the end of the world. Many lenders may deem you ineligible for a loan, or charge very high interest rates because they consider you a huge risk. However, certain lenders specialise in providing bad credit car loans and can help you fulfil your car-owning dream.
Let’s look at the concept of credit ratings and bad credit ratings, including how are they determined and how to improve them, and how they relate to bad credit car loans:
WHAT IS A CREDIT RATING?
A credit rating (or credit score) is the assessment of the credit risks associated with a prospective borrower. It is a numeric score assigned to an individual, business, or government that predicts the borrower’s ability to pay back the loan, along with the chances of the borrower defaulting.
HOW IS A CREDIT RATING DETERMINED?
A credit rating is calculated based on the borrower’s credit history, including factors such as payment history, the amount owed, types of credit, bankruptcy, payment defaults, etc. Though the precise algorithms followed by different lenders and rating organisations are not known, it is safe to say that a borrower’s credit rating depends on their past borrowing and repayment habits.
WHO DETERMINES YOUR CREDIT RATING?
Credit ratings are determined by credit rating agencies like Equifax (previously Veda Advantage), Experian, and Dun & Bradstreet. These ratings are used by lenders to determine the risk of defaulting should they lend to you.How to find your credit rating?
You can contact a credit rating organisation like Equifax, Dun & Bradstreet, or Experian to get access to your credit file. Your credit file contains basic information such as your name, age, gender, and contact details, along with your driver’s license number, employment details, and most importantly, your credit history.
Bad Credit Ratings
WHAT IS A BAD CREDIT RATING?
A bad credit rating means that you are a high-risk borrower with greater chance of defaulting. Each credit agency uses its own algorithm to calculate a credit rating and its own scale to differentiate a good credit rating from a bad one.
WHAT ARE THE POSSIBLE FACTORS BEHIND A BAD CREDIT RATING?
Factors that can harm your credit rating include:
- Missed or delayed repayments
- Defaulting on a loan
- Previous credit applications
- Exceeding card limits
- Past bankruptcy or credit infringements
WHAT IS COMPREHENSIVE CREDIT REPORTING?
In the past, credit files did not provide a very holistic view of a borrower’s overall credit performance. Even a small negative event, like a late bill payment, left a negative impact on an otherwise good credit performance.
Starting March 2014, the Australian credit system began reporting credit more comprehensively. This change included a more holistic and thorough view of the past payments, with positive events cancelling out the negative ones to get a more accurate credit report.
HOW TO IMPROVE A BAD CREDIT RATING?
Improving your credit rating requires some effort. Here are a few things you can do to help fix a bad credit rating:
- Due to comprehensive credit reporting, the positive events in your credit file can help balance out the negatives. For example, if you’re late with a loan repayment, catching up and consistently paying the loan on time in the future can help to cancel out part of your negative score.
- Paying off a new or existing loan – as per the loan schedule – can help improve your credit score.
- Check your credit history for accuracy. If you find any errors in the file, bring them to the attention of the appropriate authority to be corrected.
- A debt consolidation loan can come in handy if you have multiple outstanding debts, as a single account and interest rate is easier to manage. There are lenders that specialise in this type of loan for individuals with bad credit.
- Opting for direct debit of your repayments is a great idea. It helps make sure you don’t miss any repayments due to negligence, and thus helps to protect your credit score.
Bad Credit Car Loan
WHAT IS A BAD CREDIT CAR LOAN?
Bad credit car loans allow people with impaired credit files and bad credit histories to purchase their dream cars. These loans can also help other types of borrowers, like 457 visa holders and the self-employed, who are considered high risks by some lenders.
WHY SHOULD YOU OPT FOR A BAD CREDIT CAR LOAN?
A bad credit rating means that if you go to regular lenders, they will either not approve your loan request, or they will offer a loan at a very high interest rate. A lender who specialises in Bad Credit Car Loans can offer loans at lower interest, and with faster approval. They can also provide credit management suggestions to help you improve your credit rating. Additionally, opting for a Bad Credit Car Loan and paying it back as per the repayment schedule can help improve your credit rating and make you the owner of the car of your dreams.
WHAT FACTORS SHOULD YOU CONSIDER BEFORE APPLYING FOR A BAD CREDIT CAR LOAN?
You need to consider certain situations and weigh your options before opting for a Bad Credit Car Loan:
- Use a loan calculator to find your loan repayment amount, compare it to your income, and consider whether you can afford to make this payment each month. If not, consider offering an asset as security or getting a guarantor to lower the rate of interest.
- If your car loan’s monthly repayments are still too high, you may be able to opt for a longer loan term to reduce this amount. You’ll end up paying more in total interest with a longer loan term than a shorter one, but the monthly repayments will be more affordable. A shorter loan term, on the other hand, would mean less interest paid overall, but higher monthly repayments.
- You can choose a fixed interest rate or a variable interest rate for your car loan. A fixed rate will remain the same for the duration of the loan, for more consistent repayments and simpler budgeting. Opting for a variable rate car loan can be beneficial if there is a decrease in interest rates, but it can also be disadvantageous if your lender increases its rates. You can compare specific features of the two types of loans on our car loan comparison page.
- Check for any additional costs for your car loan, such as fees (establishment and ongoing fees, early exit fees etc.) and other charges (registration, insurance, extended warranty etc.). You may have the option to extend your car loan to cover these extra costs as well as the value of the vehicle, though this would mean paying more in interest to cover this extra debt.
- If possible, avoid borrowing 100% of the car price with your car loan, as the value of a car depreciates over time. If you’re unable to make your car loan repayments, the lender may need to sell the car to cover the cost, with you making up any remaining difference in value. The higher a deposit you can afford at the start of your car loan, the lower the principal you’ll be required to repay, and the more you’ll save on interest.
HOW TO GET APPROVAL ON YOUR BAD CREDIT CAR LOAN?
Getting a car loan with a poor credit rating can be difficult, but a Bad Credit Car Loan can help make your dream of owning a car a reality. Though these loans are intended for people with bad credit ratings, so getting approval should not be a problem in many cases, there are a few things you can do to help streamline the approval process for your Bad Credit Car Loan:
- Improve your financial situation: Take steps to improve your financial situation and your credit rating. Comprehensive credit reporting allows you to balance out your past financial problems against the positives in your file. Pay your bills on time, save money, and manage your finances smartly to get back on track. This also makes your case stronger in front of your lender.
- Avoid multiple loan applications: Compare various car loan lenders, including Bad Credit Car Loan lenders, but do not apply everywhere. You can put your financial situation forward honestly and ask your lender for advice. Apply only once you’re confident of getting an approval for the best deal to suit your situation. Loan application rejections reflect negatively on your credit file, so it’s not wise to apply everywhere.
- Be honest about your financial situation: Describe your financial situation honestly to your Bad Credit Car Loan lender. If there are discrepancies between what you say and what’s in your credit file, your lender can easily find out. This can make you appear untrustworthy to the lender.
- Maintain stable employment: Bad Credit Card Loan lenders generally prefer that borrowers have been in a stable employment situation for 12 months or more. They like to know that you have a consistent source of income for making timely repayments.
Bad credit doesn’t need to stop you from living your dream of owning a car. A Bad Credit Car Loan is what you need to help you realise this dream.