Credit Building > How to get car finance if you have bad credit

How to get car finance if you have bad credit

Wollit Team3 minute read · Updated 1st July 2024

Car finance in the UK usually involves borrowing money to buy a new or used car. The most common types are hire purchase (HP), personal contract purchase (PCP), and personal loans.

Here is how they work:

With HP, you make monthly payments over an agreed term and own the car at the end.
PCP involves lower monthly payments, but you must make a larger "optional final payment" to own the car. You can also just return the car or use it as a deposit on a new one.
Personal loans allow you to borrow a fixed amount and make fixed monthly repayments over a set period, eventually owning the car entirely.

Whichever option you choose, though, you’ll need to make an initial deposit and go through a credit check. Also, because a car finance contract is essentially a kind of loan, it will show up on your credit file and impact your credit score.

Which lenders offer car finance for people with bad credit?

There are actually a few lenders in the UK that offer car finance for people with bad credit. Here are some of the main ones:

Moneybarn: This is a direct lender who’s been around for over 30 years, and is now part of the Vanquis Banking Group, a finance company focused mostly on people with bad credit (you might recognise them from the Vanquis credit builder card).
Refused Car Finance: This is a broker, not a lender, but also focuses on providing finance for people who’ve been refused elsewhere.
Go Car Credit: this is another direct lender who specialises in bad credit car finance. They can offer loans from £3,000 to £15,000.
ChooseMyCar: ChooseMyCar is a car finance specialist that partners with over 300 lenders across the UK. While not a specialised “bad credit” lender, they also work with people with poor credit.
CarFinance 247: CarFinance 247 is another credit broker who works with people who have bad credit. It also claims to plant a tree for every car finance agreement taken by its customers.

Whichever one you choose, keep in mind a few things.

First, their APRs seem low at 10-20% per year, at least when compared to regular bad credit loans, which usually charge over 25% per year. However, most of these lower representative APRs are available on PCP contracts, which still require you to pay a lump sum if you want to keep the car.

Second, even a 20% per year can add up quickly. For example, if you borrow £10,000 over 5 years at an APR of 20%, your total cost of credit will be over £15,000. You’ll pay more than half of the value of the car in interest.

That’s why you should try to improve your credit score before taking on any of these loans. This will give you a chance to get a better deal and lower interest rates so you can get a new car without getting into even more debt.

Does car finance affect my credit score?

Yes, car finance can affect your credit score in the UK, both positively and negatively.

Here is how it works:

When you apply for car finance you’ll have to go through a “hard” credit check. This will leave a footprint on your credit report. Having multiple hard checks on your credit file in a short period can hurt your score as lenders may think that you’re struggling.
Some lenders offer a "soft check" that doesn't affect your score to give you an initial decision. This is only to check your eligibility. If you go ahead with the application, they’ll still run a full credit check.
Making all your car finance repayments on time and in full will help improve your credit score over time. Keep in mind that it can take up to three months for this repayment history to be felt in your credit score.
Paying off your car finance agreement as per the contract terms and conditions will also improve your credit score.
However, any missed payments, defaults, or the lender taking action against you can hurt your credit score – and will be recorded on your credit file for the next six years.

Can a car finance payment holiday improve my credit score?

If you're struggling with payments, you might want to take a payment holiday. This can help avoid more serious things, like missing a payment or defaulting on your loan.

However, taking a car finance payment holiday can still lower your credit score, and it will also show up on your credit report.

The best solution is really to work on your credit score and get a better and cheaper car finance deal to begin with. This will help you save on interest and make payments more affordable. Luckily, now many apps can help you build and improve credit.

One such app is Wollit. Wollit is an app available both on Android and iOS, and it works by reporting a fixed-fee monthly subscription as a loan repayment to all three credit reference agencies. This helps build your credit history and allows you to improve your credit score so you can be eligible for better car finance deals in the future – or to reduce the impact of a payment holiday if you’ve already taken one.