The details listed on your credit report can have a huge impact on the outcome of a car loan application, with bad credit history often leading to loan rejection. But it does not have to be the end of the road: you can still get approved for a car loan when you have bad credit. All it takes is some careful planning and a bit more consideration than the standard option.
There are now a lot of different avenues available for people with bad credit who still want or need to apply for a car loan. Whether it is choosing a less expensive used car, getting a partial loan, listing a guarantor or applying through one of the growing number of bad credit car loan providers, bad credit still brings a lot of viable options.
This resource article outlines the approaches mentioned above in more detail, and provides a number of tips and steps to help you improve your chances of getting a car loan approved. So if you are worried about bad credit affecting your car loan application, the sections below will help you take positive steps to get the car you want onto the road.
On this page
- Check your credit history
- Estimate your budget
- Save up or trade in for a partial loan
- Get a guarantor
- Bad credit car loans
Check your credit history
Getting a car loan with bad credit can start with understanding exactly what “bad credit” actually means. Credit reporting bureau Veda explains that credit files don’t really categorise people as having “good” or “bad” credit.
“It is simply a record of some of your credit experiences, including the types and number of credit enquiries, applications for a mortgage or credit cards etc., as well as any outstanding debt or defaults from the past five years,” Veda explains.
“A payment default on your credit file may affect a lender’s decision to grant, or extend, a loan or line of credit. This is why it can be useful to obtain a copy of your credit file and take steps to improve it.”
Lenders basically use your credit file and the other information you provide for a loan application (such as your employment and income details) to assess how likely you are to be able to make repayments. So outstanding debts and defaults can be red flags during the initial application assessment period.
The good news is that once you understand this part of the car loan application process, you can prepare accordingly by getting a copy of your credit history. Free reports are available from Veda, Dun & Bradstreet and Experian, so you can see exactly what is listed and figure out where the potential issues could be. Occasionally there are discrepancies on peoples credit reports, so it’s worth checking to make sure everything listed is right, and contacting the credit reporting agency if you have any concerns.
When you are looking at your credit history, there’s a few questions you can ask to help improve your car loan application:
- How will my credit history look to a lender?
- How much money would the car loan add to my current debts/payments?
- What other financial elements could offset the bad credit listings?
Keep in mind your credit history is only one part of what lenders use to assess your application. So if you have a high salary and other financial assets, it could balance out your bad credit. Similarly, if you have previous defaults, but proof of consistent repayments for recent loans, you could include the latter in your application to show more responsible payment habits.
Getting your credit report also gives you a guide to improving it. If you have defaults that have not been dealt with, for example, taking actions to clear the debts will benefit both your credit history and your long-term finances. That way, you will have less to worry about when it comes to applying for future car loans.
Estimate your budget
The car’s price tag and the amount of money you can realistically pay each month are usually the key elements used to figure out a car loan’s value. But when you have bad credit, it is also important to consider how much money a car loan provider would be willing to lend you.
From the lender’s perspective, a bigger loan usually means a bigger risk for them, regardless of the applicant’s financial circumstances. But add bad credit into the mix and there’s a good chance a car loan worth a lot of money will be considered too much of a risk.
So keeping in mind your bad credit when you are figuring out your price range for a car, and your budget for a loan, will help you to set realistic goals based on your needs and your financial circumstances.
As NAB outlines in a post about how much to borrow for a car loan, even something as simple as the type of car you want to buy can affect your budget, noting: “Usually a newer model car is going to cost more than a used model.” So if you have bad credit, it might be a good idea to focus on what you need from a car (as opposed to what you want). It may mean making a few compromises, but if it helps your budget then it could get your loan approved with bad credit.
Once you have figured out an amount of money you want to borrow – and that you think lenders will consider – you can start to look at different loan options that are accommodating for people with bad credit. This process will help keep your car loan search focused and help you come across as an organised, responsible loan applicant.
Save up or trade in for a partial loan
As mentioned above, the bigger the loan amount, the more likely bad credit will lead to a bad outcome. Partial loans are one of the most common solutions to this issue, as well as many other financial obstacles that could get in the way of a good car loan. This kind of loan gives you some of the money needed to buy a car and leaves the rest up to you.
There are two main ways to make partial car loans a financially viable option. The first is to start saving up money towards your car (or use existing savings). The second depends on whether or not you have a car. If you do, you can use it to help partially finance the purchase of a new car.
“If you have a car you need to sell check how much you’d get to trade it in then see what it’d be worth through a private sale,” NAB’s guide explains. “This can help reduce the amount you want to borrow too.”
While a lot of the car loans advertised have suggested amounts you can borrow, such as $15,000, most will consider applications for a lot less than this amount. It does vary from lender to lender, though. St George, for example, says that it offers secured personal car loans from $3000, while ANZ’s personal loans start from $5000. The Commonwealth Bank, on the other hand, requires a minimum of $10,000 for its personal car loans.
These variations highlight the importance of comparing car loans and lenders before making any decisions. It’s even more important to do so when you want to get a car loan with bad credit because the comparison process can help you figure out which lenders are likely to approve partial loans – and may even give you a better idea of your loan approval chances.
Get a guarantor
A guarantor is another person that agrees to support your financial decision and cover the cost of any payments you are unable to make during the term of the loan. The MoneySmart website explains that lenders often request a guarantor if they think someone may not be able to repay the loan.
“By signing your name as a co-borrower or guarantor, you are legally responsible for paying back the entire loan if the other person cannot or will not make the repayments,” MoneySmart says. “You will also have to pay any fees, charges and interest.”
From a lender’s perspective, a guarantor reduces the risk of approving a car loan to someone whose application leaves doubts in their mind. So if you have bad credit, finding a guarantor with a strong financial situation could help you get a car loan approved.
There are a few things to be aware of before going down this route, however, particularly when it comes to who you as to guarantee the loan. It could put strain on relationships if you end up struggling with repayments, for example, so choosing a person carefully and discussing the responsibilities and requirements with each other before applying will help ensure the process runs smoothly.
Bad credit car loans
While the options above can be used for any kind of car loan, they are typically required for standard car loans. But there are also a growing number of lenders specialising in offering car loans to people with bad credit.
These bad credit car loan companies usually have a strong understanding of bad credit and familiarity with scenarios where bad credit is not reflection of someone’s current financial situation. They are also more open to reviewing applications on a case-by-case basis. Some even offer no credit check car loans.
But there are a few things to be aware of before applying for a bad credit car loan, starting with rates and fees. These lenders offset the risks of approving car loans for people with bad credit through interest rates and fees that are higher than those of standard car loans.
How much more you pay for a bad credit car loan compared to a standard loan depends on the lender and your personal circumstances. If you only have one or two “bad” marks on your credit file, your interest rates and fees could be similar to standard loan options, while more negative credit history (or low income) generally attracts higher rates.
These challenges, however, are just another reason to compare loans and providers before making any decisions. Making several bad credit car loan enquiries before you apply, or using a car loan comparison service, should help you figure out which lenders will give you the best deal on a bad credit car loan.
It’s also a good idea to thoroughly read the terms and conditions of any loan you are considering so that you know exactly what is involved. While key points are highlighted for you, sometimes there are other important details in the fine print that could really affect you during the term of the loan, such as late payment penalties or early exit fees. Going through this information, and asking the lender or car loan company about anything you are unsure of will help you make a better decision when it comes to getting a bad credit car loan.
Although it can seem easy to get approved for loans before you apply, there are a lot of reasons why car loan applications get rejected. Bad credit is a growing concern for many people because lenders equate it to greater risks. But bad credit really doesn’t have to hold you back. If you have your finances in order now, and you need to borrow money for a car, you can still find a solution that is reasonable for you.
Considering all of the options outlined above is a great place to start because it will help you figure out the best approach for your goals and circumstances. Plus, by reading about the different steps you can take, you will be able to make more informed decisions, get your finances in order and increase your chances of getting a car loan approved no matter what your credit history looks like.