Don't let a bad credit rating get in the way of a car loan.
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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.
What is a bad credit car loan?
A bad credit car loan is a specialist 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 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 car loan applications
Want to know what kind of car loans you could qualify for?
Visit our personal loan marketplace and find out how your credit rates
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. A car loan calculator 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 do I get approval for a car loan with bad credit?
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.
1) Improve your credit rating
- Pay your bills on time
- Don't over-apply for credit
2) Maintain stable employment
- Bad credit car loan lenders generally prefer borrowers who have been in stable employment for at least 12 months.
- Lenders 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.
3) Be honest about your financial position
- Describe your financial situation honestly to your bad credit car loan lender.
- Discrepancies between what you say and what’s in your credit file will be easily spotted by a lender.
- This can make you appear untrustworthy.
4) 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 car loan application is likely to be approved.
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 my 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.
Get my credit score
Your credit score is one of the factors that will help determine if you can get a bad credit car loan.
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:
1) Order a free copy of your credit report
- Check your history for accuracy.
- If you find any errors in the file, bring them to the attention of the appropriate authority to be corrected.
2) Make all future 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.
3) Consider debt consolidation
- If you have multiple outstanding debts, you can roll several higher-interest debts into a new lower-interest product, paying off the debt will become both cheaper and simpler.
4) Consider setting up direct debit payments
- Automating loan repayments for credit cards and personal loans can be an effective way of ensuring you never miss a payment
You don’t need good credit to get a car loan, although the worse your credit history, the harder and more expensive it’s likely to be.
Some lenders will do business only with borrowers who have good credit. However, there are other lenders that are willing to offer car loans to borrowers who don’t have good credit. The catch, though, is that they may charge higher interest rates and fees, and also require more paperwork.
If you don’t have good credit and want a car loan immediately, you can search for lenders that work with bad credit borrowers. If you are able to wait, you can work to improve your credit score and then apply for a car loan once you have good credit.
You may be able to get a no credit check car loan in certain circumstances, although it’s important to weigh up your options before doing so.
Most lenders refuse to provide no credit check car loans, because they don’t want to give loans to borrowers without first confirming that they have a track record of repaying debts. So any lenders that do provide no credit check car loans would take measures to protect themselves against the risk of default.
That’s why no credit check car loans have higher interest rates than other car loans. Also, borrowers often have to provide security and put down a larger deposit.
You might be better off finding a specialist lender who will look at your credit history and income, who will decide whether or not you are able to responsibility pay back the loan. Alternatively, you could contact a car finance broker.
Being a student is tough enough, and while you might find the odd student discount on movies and technology, the same can’t be said about car loans, as you can’t really get a discounted student car loan.
Lenders make money on the interest and fees that they charge with loans, and the lowest interest and fees are given to the most reliable credit holders: people with excellent credit history.
As a student, you are unlikely to have enough on your credit report to warrant an excellent history. There are however, ways of getting a lower interest car loan if you can’t get an interest-free loan from the bank of mum and dad. One way of doing this may be through getting a guarantor car loan, which can get you a secured car loan by setting your parents up as guarantors.
Poor credit doesn’t necessarily mean you won’t be able to get finance for your car purchase, though your options aren’t likely to be the same as someone with good credit.
In fact, a number of specialist lenders exist offering car finance for customers with poor credit, able to provide access to bad credit car loans.
However having a history of poor credit will likely mark you as a potential risk to lenders, so your car financing needs could see higher fees and interest rates. Alternatively, consider a secured car loan, which is a type of loan that uses the car you purchase as collateral, reducing the risk.
Other options include getting someone close to act as a guarantor for your car loan, or to talk to a broker about a personalised rate specific to your circumstances.
A guarantor on a car loan is a third party, usually a relative or friend, who guarantees to meet the repayments of a loan for the purchase of a car, if the borrower/owner of the car defaults on the loan.
Guarantor car loans can be useful for people who would otherwise struggle in being accepted for credit to purchase a vehicle. These may include people with bad credit, students and young people who may have no credit history, as well as some pensioners.
Many lenders offer guarantor car loans, guarantor personal loans and guarantor home loans, because of the significantly reduced risk to the lender.
Yes, you can get a car loan with bad credit, although you’ll probably find the process trickier and dearer than that experienced by people who have good credit histories.
You can find a number of lenders that specialise in bad credit car loans. However, make sure you compare bad credit car loans before you sign on the dotted line, because not all car loans are alike and having bad credit may mean you are more likely to be hit with higher fees and interest rates.
If you have bad credit, it’s important not to take out a car loan unless you can afford the repayments because a default could further damage your credit rating. Conversely, if you make all the repayments and repay the loan successfully, your credit rating might improve.
While it’s not necessarily a guarantee, having a guarantor on your car loan will improve your chances of having your application accepted, and may mean that you are able to attain a lower interest rate loan.
Having a guarantor with excellent credit history and/or is a property owner reduces the risk to the lender because the payments are guaranteed by someone who is considered to be financially secure and reliable.
As such, even if your credit history isn’t perfect, a guarantor may be able to help you secure a lower rate from some lenders.
Student car loans are not a necessarily a product in and of themselves, but what you may be looking for is a guarantor car loan.
A guarantor car loan has a third-party act as a form of guarantee for your loan application, telling the bank or lender that if you default on your loan, someone will pay the loan repayments.
Going guarantor on a car loan is no new thing, and before internet-based credit scores, guarantor car loan applicants would apply for loans with a guarantor or property owner who could vouch for the person borrowing the loan.
To get a guarantor car loan, you’ll need someone willing to act as a guarantor for your car loan.
It’s up to individual car dealers to decide whether to promise to hold on to cars in exchange for deposits.
Some car dealers will request a deposit and promise, in return, to hold on to the car for a certain period of time. Others will request a deposit but make no guarantees, other than to return the deposit if they end up selling the car to someone else.
Some car dealers ask for deposits; others don’t. If you get asked for a deposit and you decide to pay it, make sure the dealer gives you signed paperwork before you make the payment and a receipt after you’ve made the payment.
Think carefully about your options before getting a bad credit car loan. If you don't think you can keep up the repayments, you may want to reconsider.
For more support managing your personal finances, check ASIC's Moneysmart, or contact the National Debt Helpline on 1800 007 007.
Before you apply:
The following car loan offers are not specifically bad credit car loans. We’ve shown you these car loans to help you compare what’s available in the Australian market, and make a more informed financial decision.
Before you apply for a car loan, consider checking your credit score and contacting the lender to discuss your situation. A financial counsellor may also be able to provide more specific advice.