You may feel that having a bad credit score prevents you from getting a car on finance, and there’s no coming back. That’s not true. There are several places you can get car loans on bad credit, and meeting all of your repayments actually helps to improve your credit score.
If you want to know more about financing a car with bad credit, keep reading.
Why you should try to pay upfront
If you can buy a car outright, this is usually the best option – but can be extremely difficult if you have a tight budget. The reason is that paying for the entire cost upfront eliminates any interest rates you may find applied to the cost of buying your car. There are several ways to finance a car, which we’ve listed below.
- Personal Contract Hire (PCH)
- Personal Contract Purchase (PCP)
- Hire Purchase
It’s important to remember that falling behind on payments can have a massive impact on your credit score, and also affect your financial stability for years afterwards. If you are currently unable to afford monthly repayments, it may be wiser to either look at a cheaper car, or build up some funds to ease the financial commitment.
Personal Contract Hire
With the PCH method, you technically don’t own the car. Instead, you end up ‘hiring’ the car from the finance company. While this means you’ll have to return the car at the end of the lease, it can work out much cheaper if that’s your intention.
Since you never actually own the car, any additional costs (such as servicing and car tax) are paid for by the leasing company. The only other thing you’d need to pay for is the fuel you use.
So how does a PCH work?
First, you’ll usually need to pass a credit check and may have to pay several months upfront. With long-term deals, it’s important that you’re able to afford to pay the monthly payments. If you can’t, or aren’t sure if you’ll be able to, it’s better to rethink buying the car this way.
If you are sure that you can, then feel free to sign the contract and begin your lease. Over the course of your lease, you’ll be given a mileage agreement that you’ll have to stick to. If you do exceed this limit, you may find additional charges applied to the lease of the car.
You’ll also be required to keep the car in as good a condition as possible, as damage considered excess to natural wear and tear would also incur extra charges. At the end of your lease, you’ll have to hand the car back and are free to lease out another car.
PCH is a great method if you want to replace your car every few years without the hassle of having to buy and sell it. The fact that you don’t have to pay for services or car tax is also extremely useful, but you do have to stick to strict guidelines throughout your lease agreement.
Personal Contract Purchase
Similar to how a PCH works, if you take out a PCP on a car, you’ll find yourself having to follow similar rules with some slight differences.
The biggest difference between a PCH and a PCP is that you have several options regarding the car when your contract ends. You can:
- Return the Car
- Keep the Car (by paying off the resale value)
- Finance a New Car
The initial process is similar to a PCH, with you needing to pass a credit check and pay a fee upfront. With a PCP, this is usually 10% of the vehicle’s value.
During the contract, you’ll be subject to mileage limitations and have to stick to them to avoid any extra charges. Once the contract is up, you’ll be able to choose if you want to make a final payment.
This last payment will be larger than the others and entitles you to ownership of the car. The cost of this payment is based on the Guaranteed Minimum Future Value (GMFV) of the car that was agreed when you signed the contract. Alternatively, you can instead use the GMFV as a deposit on a new car and begin the process again.
The most simple method of car finance, when you Hire Purchase a car you pay an initial deposit and then make monthly payments on the car. While the usual deposit is around 10% of the car’s value, paying more upfront can lead to much lower monthly repayments.
Buying through Hire Purchase differs from other methods of finance, as the loans are secured against the car. This means that the car isn’t yours, and if you fail to meet repayments, it can be repossessed. However, if you’ve paid at least 34% of the car’s value, it’ll need a court order to get repossessed.
There are also some potential advantages to using Hire Purchase. For example, (if there is an agreement in place,) once you’ve paid half the cost of the vehicle, you may be able to give the car back and avoid any additional payments. This is great if after you’ve owned the car for a while, you realise that it isn’t well-suited to you.
And that’s our quick guide on the most common types of car finance. These are widely available, even if you have a bad credit score. If you are considering taking out a finance loan for a car, it is advised that you look with a ‘soft-search’ before you apply. Otherwise, you could find yourself rejected and your credit score will take further damage.