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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

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 withbad 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.  

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

Can I get a car loan with bad credit?

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.

What is a bad credit car loan?

A bad credit car loan is a car loan for borrowers who have ‘bad credit’ or a bad credit history.

Some lenders refuse to offer bad credit car loans, because they believe there is an excessive risk that bad credit borrowers will not repay their loans. However, other lenders are willing to provide bad credit car loans.

Generally, these lenders charge higher interest rates for bad credit car loans than ‘prime’ car loans, reflecting the higher level of risk. Bad credit car loans may also have higher fees than prime car loans.

However, the big advantage of a bad credit car loan is that it allows borrowers with bad credit to access finance. Another advantage is that it could help bad credit borrowers improve their credit rating, assuming they make all their repayments on time.

Do I need good credit to get a car loan?

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.

Are bad credit car loans legit?

Bad credit car loans are legit, although not all lenders and products are created equal.

Some car loan lenders refuse to do business with borrowers who have bad credit histories, but there are others that are willing to provide bad credit. There is a catch, though: some bad credit lenders are disreputable, while some bad credit loans have extremely high interest rates and fees.

That’s why it’s important to do your research and compare bad credit car loans before you submit an application.

 

Who provides bad credit car loans?

Lenders that provide bad credit car loans tend to be smaller challenger lenders rather than the bigger banks.

Bad credit car loans are a niche product. The bigger banks tend to focus on mainstream car loan finance for borrowers with better credit histories. That’s why smaller lenders tend to be the ones that provide bad credit car loans.

Bad credit car loans can have high interest rates and fees, so it’s important to compare options before submitting an application.

Final thoughts

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.