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Bad credit car loans explained

A bad credit rating can be an obstacle if you’re looking to take out a loan to buy a car – but it doesn’t have to be the end of the world. True, some lenders may refuse to give you a loan or charge you higher interest rates. However, other lenders are comfortable with making bad credit car loans.

Before talking about bad credit car loans, we need to look at the concept of credit ratings and bad credit ratings, including how they’re determined and how they can be improved. That will then allow us to look at bad credit car loans in the proper context.

What is a credit rating?

A credit rating (or credit score) is a number that summarises the credit-worthiness of a particular borrower, which may be an individual, business or government. A credit rating is a used to predict 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 reporting agencies like Dun & Bradstreet, Equifax (previously Veda Advantage), Experian and the Tasmanian Collection Service. Each agency uses its own assessment and scoring methodology. These ratings are then used by lenders to determine the credit-worthiness of prospective borrowers.

If you want to find out your credit rating, you can contact one of those credit reporting agencies to request access to your credit file. Your credit file contains your credit history – what loans you’ve applied for, what loans you’ve been granted and your record of repayments. Your credit file also contains biographical information. 


How to get a free copy of your credit report

Every Australian is entitled to receive one free copy of their credit report each year. The only condition is you’ll have to wait 10 days – if you want it faster, you’ll have to pay. Here’s how to contact the four credit reporting agencies:

  • Dun & Bradstreet 1300 734 806
  • Equifax 13 83 32
  • Experian 1300 783 684
  • Tasmanian Collection Service (03) 6213 5555 

What is a bad credit rating?

A bad credit rating means that a credit reporting agency has assessed you as a high-risk borrower with a greater chance of defaulting. Each credit reporting agency uses its own algorithm to calculate a credit rating and to differentiate a good credit rating from a bad one.

What are the causes of a bad credit rating?

There are several possible ways you can damage your credit rating, including:

  • Falling behind on your repayments
  • Missing repayments altogether
  • Defaulting on a loan
  • Making too many credit applications
  • Getting rejected for credit applications
  • Exceeding credit limits on your credit card
  • Declaring bankruptcy

What is comprehensive credit reporting?

In the past, credit files only contained negative credit events (such as late payments). Because they omitted positive events (such as on-time payments), they did not provide a fully accurate view of a borrower’s credit history. That meant even a small negative event, like a late bill payment, could damage a person’s credit history.

Hence the introduction, in March 2014, of comprehensive credit reporting, which includes both positive and negative events. That means that consumers have the chance to cancel out isolated negative events with a history of positive events, such as paying off without being late on a single repayment. 


How to improve a bad credit rating?

Having a bad credit rating isn’t good. But it doesn’t have to be a permanent state. As a general rule, fixing a bad credit rating takes time and requires effort, but it can be done. Here are a few things you can do to help fix a bad credit rating.

First, order a free copy of your credit report (which you’re entitled to do once per year). 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.

Second, take care to make all future loan repayments on time. Thanks to comprehensive credit reporting, such positive events can help to cancel out the negatives. An obvious way to cancel out a history of late payments is to build up a record of on-time payments.

Third, investigate whether a debt consolidation might help, if you have multiple outstanding debts. If you can roll several higher-interest debts into a new lower-interest product, paying off the debt will become both cheaper and simpler. That will then help you build a better credit history.

Finally, investigate whether you could benefit from setting up direct debit repayments, for things like credit cards and personal loans. Automating loan repayments can be an effective way of ensuring you never miss a payment – because payments you forget to make count against you just as much as payments you can’t afford to make.

What is a bad credit car loan?

A bad credit car loan is a special car loan for borrowers with imperfect credit histories. Bad credit car loans can also be used by other borrowers who are regarded as high-risk, such as people who are self-employed or who are temporary residents of Australia. As always, lending policies differ from lender to lender.

Should I get 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. However, a lender that specialises in bad credit car loans may be able to give you cheaper loans and with faster approval times.

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, which might then allow you to escape the ‘bad credit’ category. 

How to maximise your chances of getting a bad credit car loan

  • Improve your financial situation and credit rating
  • Maintain stable employment
  • Be honest about your financial position
  • Avoid multiple loan applications 

What should I consider before taking out a bad credit car loan?

If you’re thinking about taking out a bad credit car loan, use a car loan calculator to research different repayment scenarios. That will tell you whether or not you can afford a loan, based on variables such as loan size, loan term and interest rate.

If your monthly repayments are too high, you might be able to reduce them by opting for a longer loan term and/or a balloon payment at the end. Please note, though, that you’ll end up paying more over the life of the loan. (Conversely, a shorter loan term without a balloon payment would mean lower whole-of-loan costs.)

During your research, you should also weigh up whether you want a variable-rate loan or a fixed-rate loan. A variable loan could go up or down, which would either harm or help your financial position. A fixed loan, though, would never change, which would make it easier for you to budget.

Don’t forget that interest rates aren’t the only cost – there are also various fees and charges to consider. These may include loan establishment fees, loan account-keeping fees, car registration, car insurance. You may be allowed to take out a bigger loan to cover these costs – although that would mean you’d ultimately pay more in interest.

Finally, it’s often a good idea to put down a deposit on a bad credit car loan. 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. Although these car loans are intended for people with bad credit ratings, there are a few things you might want to do to improve your chances.

First, you might want to improve your financial situation and credit rating. This can be done by increasing your income, saving money and paying bills on time. Comprehensive credit reporting allows you to balance out your past financial problems with positive actions.

Second, maintain stable employment. Bad credit car loan lenders generally prefer borrowers who have been in stable employment for at least 12 months. They like to know that you’re able to hold down a job, so you will have a consistent source of income for making timely repayments.

Third, be honest about your financial position. 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.

Fourth, avoid multiple loan applications. Lots of applications will reflect negatively on your credit file, as will any rejections. Once you’ve found a preferred lender, have an honest in-depth chat with that lender about your position and your chance of securing approval. If the lender gives you the green light, you’ll know your application is likely to be approved.

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