Can you get a car loan with bad credit?

If your credit record shows information that might be of concern to a lender, could you still be approved for a car loan? Is it a good idea to apply for a loan at all if your credit record is ‘bad’?

As we’ll see, the answers to these questions will depend on your situation and the lender’s policies, but generally speaking, getting a car loan with bad credit can be difficult and you may have fewer options to choose from than a borrower with a good credit history. Read about:

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. 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 money to you.

If you have a low credit score, it could be considerably more difficult to be approved, and it’s worth understanding that you might not be able to access the same loans, interest rates and other conditions that a borrower with a good credit record would. More on this to come.

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, when assessing a loan application, lenders generally consider a range of factors that, taken together, allow them to decide 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, or could potentially still approve it, based on the other aspects of the application.
  • Income: Lenders will generally ask you to include details of what you earn in your application to get an idea of how much disposable income you have that could be used to pay off the loan. If it is a joint application – with a spouse, for example – the lender would typically consider the combined income of all applicants. Your income could include your salary, benefit payments or investment earnings.
  • 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 debt, the lender will likely consider this in the assessment.
  • Loan amount: How much money you are looking to borrow could also play a part. 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? If you are seeking a lower loan amount, you may be more likely to be approved, depending, of course, on an overall assessment that considers all other applicable factors and your personal circumstances.

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

Remember, though, that each lender has its own assessment and eligibility criteria for car loans, so it could be worth checking these before applying with a particular provider. The same generally applies to dealer finance for a vehicle purchase or other types of finance, such as a novated lease.

According to MoneySmart, applying for a few 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, understanding the factors above, including any that are unique to a particular provider, may be helpful before you decide whether to apply.

Car loan with bad credit
Source: red mango (Shutterstock).

What kind of 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:

  • Bank car loan: Some ‘traditional’ lenders such as banks and credit unions may offer loans to applicants with ‘bad credit’, subject to the other assessment criteria discussed above. Bear in mind, though, that it’s likely to be more difficult to get a loan with bad credit, as banks generally apply strict lending criteria to reduce the risk of customers defaulting on their loan (i.e., not being able to pay it back).
  • Specialist ‘bad credit’ loans: There are some lenders who offer loans specifically designed for borrowers with bad credit. These loans can come with high interest rates and fees on account of the risk that goes with offering loans to borrowers with a bad credit record. 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.
  • Dealer finance: The finance offered by car dealers works in a similar way to a bank loan. One notable difference is that loans from a dealer sometimes involve the borrower needing to make a balloon payment at the end in order to own the car. Dealers generally also carry out a careful assessment of the borrower before approving finance. This could include a credit check, but the outcome of that may not rule out a borrower automatically. Like banks, dealers may simply charge a higher interest rate to borrowers with bad credit 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 might be approved if someone – a family member, say – acts as guarantor for the loan. This person would take on responsibility for paying back the loan if the borrower defaulted. This arrangement removes some of the risk for the lender, instead shifting much of the risk to the guarantor. This arrangement can strain the borrower’s relationship with their guarantor, so it could be worth thinking your options through carefully 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 representing less of a risk to the borrower 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, however, so consider checking with your chosen lender before applying. Even if you do get approved for an unsecured car loan (so aren’t risking the vehicle being repossessed if you default) there is always the possibility of a lender taking you to court if they have to reclaim any losses. In this situation, your credit rating would also be adversely affected.

When a borrower is approved but is seen to be more of 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 purchase of a new or used car on Canstar’s database use risk-based pricing structures. This means the lender would take account of factors such as your credit score before deciding what interest rate would apply to your loan. The borrower’s credit record is one factor that could determine where in a range their interest rate ends up being, but it could also depend on whether the car is new or old, as well as other variables (the loan amount, borrower’s financial situation etc.).

As at 13 August 2020, car loan interest rates on Canstar’s database range from 2.99% p.a. (comparison rate 3.53% p.a.) all the way up to 20.25% p.a. (comparison rate 23.25% p.a) for a new car with a loan amount of $30,000 and a loan term of 5 years in NSW.

Apply bad credit car loan
Source: Jacob Lund (Shutterstock).

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, here are some steps to consider which may improve your chances of being approved.

  1. Check your credit score: It may help to understand exactly where you currently stand. Your credit score can change over time, so getting an up-to-date idea of how you’re tracking could help you decide whether now is the right time to apply for a loan.
  2. Improve your credit score if you can: It may be beneficial in the long run to take the time to build up your credit score before applying for a loan. A higher credit score could improve your chances of approval, and may even mean getting more favourable terms on your loan – such as a lower interest rate, for example.
  3. 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 submitting applications that don’t stand much of a chance. For example, some loans are only available to borrowers with an ‘excellent’ credit score. It may even be worth contacting the lender to make an initial enquiry, as a full application is likely to be recorded on your credit history.
  4. 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 evidence of your financial situation. It could help to gather together as much of this evidence as you can to support your application and be careful not to leave out any relevant  information.
  5. Develop good financial habits: In addition to the information recorded on your credit record (paying bills etc.), demonstrating good financial habits, like putting money into savings regularly, could help demonstrate to a lender that you have the financial discipline required to pay off a loan.
  6. Apply with your preferred lender: After considering your personal circumstances, as well as the eligibility criteria and other factors lenders take into account when assessing bad credit applications – it’s time to decide whether it’s appropriate for your situation to take the next step and apply with your preferred lender. If you’re unsure, it may be a good idea to take the time to speak with a financial advisor 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 any alternatives that 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 all borrowers, 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, such as from the National Debt Helpline on 1800 007 007.

With Australia in a recession, being smart with your money could be more important than ever for many of us. Canstar’s Budgeting and Saving Money hub includes the latest news and articles that may be of interest to you, including:

This article was reviewed by our Sub-Editor Jacqueline Belesky before it was published as part of our fact-checking process.

Main image source: RomanR (Shutterstock). 

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