Bad credit car loans

Getting a car loan with bad credit can be challenging, and you may have fewer options to choose from compared to a borrower with a good credit history. But it is still possible to get a car loan with a bad credit score.

If you are concerned about your credit score, you may want to consider whether taking out a car loan is a good idea at all.

What is a bad credit car loan?

Some lenders offer specialist car loans specifically for borrowers with bad credit.

These loans may have higher interest rates and fees than more typical personal loans, due to the risk that goes with offering loans to borrowers with a bad credit record. Lenders may also have stricter eligibility criteria in other areas, such as:

• needing extra documentation as proof of income and expenses

• limiting the maximum amount you can borrow

• requiring you to pay an upfront deposit.

The exact requirements for a bad credit car loan may vary between lenders. As with any lending arrangement, it can be worth reading the terms and conditions carefully to ensure you know exactly what you’re signing up for.

Can you get a car loan with bad credit?

Having a bad credit record – and as a result, a low credit score – may not automatically rule you out of being approved for a loan by some providers.

If you have a low credit score, it could be considerably more difficult to be approved for a standard car loan. You might not be able to access the same loans, interest rates and other conditions that a borrower with a good credit record would.

Lenders generally look at a range of factors when considering whether you are a suitable candidate for a loan. Your credit record is one of these factors, but if the rest of the information on your application meets the lender’s criteria, they might still lend you money. The more of the lender’s eligibility criteria you can satisfy, the more you can lower the lender’s financial risk, and the more likely you may be approved for a car loan.

According to the Australian Government’s Moneysmart website, applying for multiple loans over a short period of time can look bad on your credit report. While there are steps you can take to improve your credit score, it may also help to understand how different lenders assess car loan applications before you apply.

How do lenders assess bad credit loan applications?

Lenders legally can’t provide a loan if it is not suitable for the borrower – for example, if the lender believes you would not be able to meet the repayments. Because of this, lenders generally consider a range of factors when assessing a loan application to help them determine whether the loan is suitable for the person who’s applying.

These factors can include:

Credit history

Most lenders will check your credit record and credit score to get an idea of your track record as a borrower. If your credit history is considered ‘bad’, then the lender may decline the loan. That said, other aspects of the application could help see your car loan approved.

Income

Lenders will generally ask what you earn to get an idea of how much disposable income you have that could be used to pay off the loan. Your income could include your salary, benefit payments or investment earnings. If it is a joint application – with a spouse, for example – the lender would typically consider the combined income of all applicants.

Expenses

How much are you spending on day-to-day living expenses, such as rent, bills and groceries? The lender will generally factor this in too.

Other debt

If you have other loans to repay, or credit card debts, the lender will likely consider this in their assessment.

Loan amount

The amount of money you are looking to borrow could also affect your loan’s chance of approval. For example, are you wanting to borrow a large amount for a new or high-end vehicle, or a more modest sum for a second-hand car? In some cases, lower loan amounts may be more likely to be approved.

These factors are generally considered in combination. For example, depending on the amount, a hypothetical borrower with a bad credit record might still be approved for a loan if they have a high, stable income and low existing debt levels.

Each lender has its own assessment and eligibility criteria for car loans. The same generally applies to dealer finance for a vehicle purchase or other types of finance, such as a novated lease. It could be worth checking a lender’s requirements before applying with a particular provider.

What car loans could be available to borrowers with bad credit?

There are different types of car loans that may be available for borrowers with bad credit, including:

Specialist lenders

Some finance companies specialise in providing loans to borrowers with bad credit, including car loans. Bad credit lenders are familiar with the special needs of borrowers with lower credit scores, including people with paid and unpaid defaults, and those with no credit history. Before applying, it may be worth comparing a specialist bad credit lender’s eligibility criteria to your own personal circumstances, to make sure you’re applying with a lender that can help you.

Bank car loan

Some ‘traditional’ lenders such as banks and credit unions may offer loans to applicants with ‘bad credit’, subject to their own assessment criteria. It may be more difficult to get a standard car loan with bad credit, as banks often apply strict lending criteria to reduce the risk of customers defaulting on their loan (i.e. not being able to pay it back).

Dealer finance

The finance offered by car dealers works similarly to bank loans. One notable difference is that loans from a dealer sometimes involve setting aside part of the loan balance to be repaid as a lump sum at the end of the loan term as a balloon payment in order to own the car.

Dealers generally also carry out a careful assessment before approving finance, which could include a credit check. Like banks, dealers may not automatically decline bad credit borrowers, and may simply charge a higher interest rate due to the increased risk involved in providing the loan.

Guarantor car loans

Applicants who might otherwise not be eligible to borrow money to buy a car could be approved if someone, such as a family member, acts as guarantor for the loan. This person would take on responsibility for paying back the loan if the borrower defaults, removing some of the lender’s risk. That said, this arrangement could strain the borrower’s relationship with their guarantor, so it’s worth carefully thinking through your options before committing.

Secured or unsecured loans

A secured car loan, where the car would be sold by the lender to repay the loan if the borrower defaults, is generally seen as less risky to the lender than an unsecured loan. As a result, lenders might only provide a car loan to a ‘bad credit’ applicant if the loan is secured by the vehicle being purchased.

Lenders’ policies may vary, so consider checking with your chosen lender before applying. Even if you’re approved for an unsecured car loan (so you aren’t risking the vehicle being repossessed if you default) the lender can still take you to court to reclaim any losses if you don’t keep up with your repayments. This could also risk negatively affecting your credit rating.

→ Buying a new car? Compare car insurance with Canstar

Will I pay more if I have bad credit and want a car loan?

When a borrower is approved for a car loan, but is still seen to be a risk to the lender, they may have to pay a higher interest rate than a borrower with good credit. For example, some of the personal loans available for the purchase of a new or used car on Canstar’s database use risk-based pricing structures. This means the lender would consider factors such as your credit score before deciding what interest rate would apply to your loan.

As well as their credit record, other factors that could affect a borrower’s interest rate include whether the car is new or old, the loan amount, the borrower’s financial situation, and more.

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How to apply for a bad credit car loan

While it can be more difficult and expensive to get a car loan if you have bad credit, you could consider taking some of the following steps that may help improve your chances of being approved:

Check your credit score

Your credit score can change over time, so getting an up-to-date idea of how you’re tracking could help you understand exactly where you currently stand, and decide whether now is the right time to apply for a loan.

Improve your credit score if you can

Taking the time to build up your credit score before applying for a loan could help improve your chance of approval. You may even get to benefit from more favourable terms on your loan, such as a lower interest rate.

Understand the lender’s eligibility and assessment criteria

Taking time to understand who is likely to be approved for a loan could save you time and make sure you aren’t submitting applications that are unlikely to be approved. For example, some loans are only available to borrowers with an ‘excellent’ credit score. It may be worth contacting the lender first to make an initial enquiry, as a full application is likely to be recorded on your credit history.

Gather as much supporting information as you can

The lender may ask for pay slips, bank and credit card statements, evidence of benefit payment eligibility and other proof of your financial situation. Lenders may also require more documentation for bad credit car loans than for more standard car loans. Gathering as much documentation as possible ahead of time could help to support your application.

Develop good financial habits

Paying bills and loan repayments on time may be recorded in your credit history and help improve your credit score over time. Also, demonstrating good financial habits, such as putting money into savings regularly, could help show lenders that you have the financial discipline required to pay off a loan.

Consolidate debts

Paying off outstanding personal loans and credit card debts could help to improve your credit score, or at least help a lender feel more confident about providing you a car loan. To simplify your repayments, you could look into consolidating your other debts into a single loan, with one interest rate. Just keep in mind that in some cases you could end up paying more interest on a debt consolidation loan, such as if the loan term is longer.

Apply with your preferred lender

The best lender for your needs may depend on your personal circumstances, as well as the lender’s eligibility criteria when assessing bad credit applications. If you’re unsure, you could consider speaking with a financial adviser or financial counsellor about your situation.

Should I apply for a car loan if I have bad credit?

If you have a bad credit record, it could be worth thinking about what alternatives may be available to you before applying for a car loan and taking on new debt. For example, do you have any savings you could use to fund the purchase? Or, could you wait until you have built up savings, or improved your credit record to the point where you are in a stronger position to apply for a loan?

Taking out a loan generally involves a degree of risk for any borrower, and this can be especially true for people who already have a bad credit record. Consider seeking the advice of a professional before committing to a loan. Free financial counselling is available from the National Debt Helpline on 1800 007 007.

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