Getting car finance when you have a bad credit rating

Driving a car is an essential method of getting around for the vast majority of the adult population, but when a car needs replacing, many people find it difficult to lay their hands on the sums of money required to buy a decent quality car and instead turn to finance to facilitate the purchase. However, ever tightening criteria by mainstream finance providers has resulted in more customers being turned down for car finance, often because of a bad credit history.

If you're having difficulty getting car finance, perhaps you've already been given a red light, there are a number of reputable companies specialising in helping people with bad credit history who may be able to turn the light green. Specialist car finance companies tend to use experienced trained staff known as underwriters, to individually evaluate each application with their decisions being based on the current affordability of the applicant notwithstanding past or present credit issues such as CCJs, missed payments, defaults and arrears. These companies appreciate that not everybody has a perfect financial history and they do their utmost to sanction a deal, providing the person can afford the repayments.

Many of us experience financial pressures at some point during our lives, often due to a change of circumstances such illness, redundancy or divorce. When there is less money coming into the household than is committed to go out, missed payments on a credit card, loan, mobile phone contract or energy bill often result, all of which will be documented in your credit file. Whether you're after an urban run around, a family friendly people carrier or something to get you around in style, a bad credit finance provider may be able help you secure the vehicle you want.

Car finance options

Hire purchase (HP)

If you're looking for a straightforward finance agreement with the option to own the car at the end of the term, then hire purchase (HP) might suit you best. Hire Purchase is one of the most popular ways people choose to finance a car. The finance company will lend you the money to pay for the vehicle but will retain ownership of the vehicle until the finance has been paid off. You agree to make regular monthly payments over a period of between 12 and 60 months and at the end of the term the ownership of the car passes to you. You will be listed as the 'registered keeper' of the car with the DVLA and will be responsible for maintenance, repairs and covering it for insurance, but the finance company remains the legal owner until the amount you borrowed has been fully repaid. The interest rate for Hire Purchase agreements will be set by your finance provider and will vary depending on how much you borrow, how long you choose to pay it back, the size of a deposit if any and how risky the company rates you as a borrower.

Personal contract purchase (PCP)

Personal contract hire is better known as car leasing and works on the basis of the finance company leasing you a vehicle for the term of the contract. The finance company will set a figure they guarantee the vehicle will be worth at the end of the contract which is known as the 'guaranteed minimum future value' (GMFV) and will be based on the age of the car and anticipated mileage. They then deduct the GMFV figure plus any deposit you have paid and the value of any car you are part-exchanging from the sale price of the vehicle. The figure they reach provides the basis for calculating your monthly payments. You will then pay a fixed monthly fee throughout the duration of the contract, which is typically between 24 and 60 months. Ownership of the vehicle is retained by the finance company until the end of the contract when you will have the option to either purchase the car for price agreed at the start of the contract (GMFV) or return it to the finance company and arrange a finance agreement on a new car. Usually the payments for PCP are comparably lower than buying on HP.

It's essential that you only apply for car finance if you are confident that you can make monthly repayments without undue difficulty, both now and in the foreseeable future. The reputable bad credit car finance companies have responsible lending policies which are designed to ensure that they do not take on a new customer you cannot comfortably afford to repay what they borrow.

Buying a car is often the biggest purchase most of us ever make other than buying our home, so you need to be sure you buy from a company you can trust. The companies offering sub prime car finance, tend to operate as either specialist car dealers - where they provide both the finance and the car or lenders only where you source the vehicle from a reputable car dealer.

Specialist bad credit car dealers

Specialist car finance dealers arrange the finance and supply the vehicle. Usually the vehicles on offer are quality used cars and you will make an appointment with your nearest showroom to select and test drive a vehicle.

Finance only

Once you've been approved for finance with one of these companies, you'll be free to purchase a motor vehicle from a dealer of your choice.