Life happens. Sometimes unexpected emergencies arise that put us in a tricky financial situation. Maybe you have a history of making late payments to lenders, or perhaps you simply haven’t built up enough years of credit history. No matter how you got there, it’s worth understanding how a low credit score can affect your ability to get approval for a car loan.
A typical credit score will fall between zero and either 1000 or 1200, depending on the credit reporting agency. A score that falls below 629 is generally described as ‘poor’. A poor credit score may impact how much you can borrow, the interest rate you are offered, as well as other loan features.
The good news is that while a poor credit score can make borrowing money for a car challenging, that doesn’t mean it can’t be done. Many lenders are willing to provide car loans for people with poor credit scores, as long as they feel sure you’re able to make repayments regularly without falling into financial difficulty.
Plenti can tailor a car loan solution to suit your circumstances, including competitive rates and flexible feature, even if you have poor credit.
How much can I borrow if I have poor credit?
Just as everyone is different, every car loan is also different. The amount you can borrow will depend on your individual life circumstances, including your income, expenses and other debts.
Take the time to work out how much you can afford to pay each month on top of your current expenses. You can crunch the numbers on this useful calculator on the MoneySmart website.
Remember, every time you apply for credit (including credit cards, personal loans and car loans) it affects your credit score. Find out which lenders are likely to approve your loan before you submit an application to prevent a black mark on your credit report. You can do this by contacting the lender to make an initial enquiry, rather than submitting a full application.
When considering your application, lenders will take into account:
Will my car loan be secured or unsecured?
Even if you have a poor credit score, the lender may agree to offer you a secured car loan. This type of loan is usually secured by the car itself. This means if you can’t make repayments, the lender can take the car and sell it to recover the cost of the loan.
An unsecured car loan, on the other hand, does not require an asset to be provided to secure the loan, so it is considered riskier for the lender. Keep in mind, even if you are approved for an unsecured car loan, there is always the possibility of the lender taking you to court if you default on the loan. In this situation, your credit rating would be negatively impacted.
How can I find my credit score?
You can get a copy of your credit report and credit score for free every 3 months. Check your credit report by contacting one of these credit reporting agencies:
Equifax: phone 138 332
illion: phone 132 333
Experian: phone 1300 783 684
Simply call to get your credit score on the spot or access your report online within a day or two. You could have to wait up to 10 days to get your report by email or mail. Checking your credit report will NOT impact your credit score.
Alternatively, you can find out your credit score online for free through government financial guidance site Moneysmart, or financial comparison sites like Canstar.
There’s no doubt about it, having a positive credit report makes it much easier to get approved for a car loan. The good news is it’s easy to build and polish your credit history and you don’t need to take out a credit card to do it.
Simply by paying your bills on time, such as mobile phone and electricity, you will start to build a positive financial report. Think about setting up direct debit payments for these bills so that you always pay on time.
Consider lowering your credit card limit and try to pay more than the minimum repayment. Remember, applying for multiple loans over a short period of time can look bad on your credit report. Reducing the number of applications you make for credit will improve your credit score over time.
Which lenders offer car loans to borrowers with poor credit?
When you’re researching car loans, it pays to look beyond the ‘Big Four’ banks. Online lending platforms, also known as peer-to-peer lenders, often provide a faster approval process and lower interest rates than traditional lenders.
This type of lender, also known as ‘peer-to-peer’ lending or marketplace lending, allows you to seek a loan from a private lender. All P2P lenders set their own loan requirements and terms.
If you have a poor credit score, it’s possible that your car loan will come with higher interest rates and fees, so it’s a good idea to check the comparison rates of various lenders to make sure you find the best loan option to suit your needs. Comparison rates do the hard maths for you by rolling together the interest rate, upfront fee and service fee into one percentage figure. It gives you a more accurate understanding of the cost of your loan.
Financial comparison sites like Canstar, Ratecity, InfoChoice and Mozo can help you find and compare the best deals on car loans quickly and easily, including loans offered by P2P lenders.
Car dealer finance
Many car dealerships offer their own loans when you buy directly from their car yard. This type of finance is usually very swift to arrange and may include a tempting up-front offer, such as zero interest for the first few months.
But beware the fine print! Car dealer finance may come with hidden fees and charges, such as up-front and monthly administration fees, and/or a ‘balloon’ payment. A balloon payment is a large sum paid at the end of your loan in order for you to own the car.
It’s a good idea to calculate whether the total repayments on the loan will end up being higher with the extra fees and balloon payment before committing.
Banks and credit unions
Some banks and credit unions may approve car loans for people with poor credit scores, but only if they meet their additional strict criteria. You probably have a long history with your bank through your savings accounts, which might help if you have no credit history or a poor credit score. A traditional car loan from a bank or credit union can be secured or unsecured.
Having a family member or friend with good financial status and credit history act as a guarantor application could improve your chances of being approved for a car loan if you have no credit score yourself. This means they co-sign the loan and agree to accept responsibility for the repayments if you default for any reason. Your guarantor acts as a type of security, making it less risky for your lender to loan you the funds.
You might even be able to borrow a larger amount and secure a lower interest rate if you have a guarantor on your personal loan, which means you’ll save money over the life of the loan.
But remember, it’s a big responsibility for both of you. If you can’t make repayments down the track, your guarantor will need to foot the bill, which could damage your relationship or impact family dynamics.
Make a move.
The first step in applying for a Plenti loan is to request a RateEstimate. It only takes around 1 minute to complete and will quickly tell you whether you’re eligible to apply for a loan with Plenti. It will also provide you with an estimate of the fees, charges and interest rate that may apply to your loan.
If you’re happy with your rate estimate, we’ll typically finalise successful loans within a day or two of receiving your complete application. It’s that simple!
Remember, requesting a free RateEstimate won’t impact your credit score and there’s absolutely no obligation for you to proceed with a loan application.
Make the first move and you could be hitting the road sooner than you think.