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Can You Get A Car Loan With Bad Credit?
●June 9, 2021●6 minute read
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Is bad credit holding you back from securing a car loan? People with bad credit histories can find it difficult to get approved for a car loan. However, there are ways you can improve your credit track record to look more attractive to financial lenders.
In this guide, we give a rundown of whether you can get a car loan with bad credit and tips to improve your credit score.
What is a bad credit score?
A bad credit score can indicate to financial institutions that you are not a reliable borrower. Unfortunately, this can negatively impact your chances of getting approved for a loan.
Your credit score is based on a number of factors, including how many credit applications you have made, type of credit you’ve accessed, whether you’ve made payments on time, and the amount of money you have borrowed. For instance, failing to make timely payments on bills can indicate to loan providers that you may be struggling to make your repayments. Understanding your credit score may help you negotiate better credit terms, and also understand why you are rejected from lenders.
What makes a credit score ‘bad’ can vary depending on which credit bureau you consult. The three major credit bureaus — Equifax, Experian, and Illion — in Australia each have their own rating of ‘bad’ or ‘below average’ credit:
||0 – 505
||506 – 665
||666 – 755
||756 – 840
||841 – 1,200
||0 – 549
||550 – 624
||625 – 699
||700 – 799
||800 – 1,000
||Room to Improve
||1 – 299
||300 – 499
||500 – 699
||700 – 799
||800 – 1,000
Equifax, Experian, and Illion are all able to provide your credit report and credit score free of charge every three months. As such, you should avoid any providers who ask for payment when gathering your credit report. It’s also important to check your personal details on these reports to ensure they are correct.
As each of these bureaus have different rating systems, keep in mind that you may have multiple credit scores.
Can I get a car loan if I have bad credit?
A bad credit score can negatively affect your chances of getting a loan approval, especially from traditional lenders. However, there are still ways you can secure a car loan if you have bad credit.
When you apply for a loan, the lender needs to decide whether it is suitable for you. This process includes assessing a range of factors — not just your credit history. They can also look at your income, expenses, recent banking history, and any other debt you may have. They will then assess these factors against the loan amount you’ve requested.
As we mention below, people with poor credit ratings are able to apply for a bad credit car loan. Additionally, some traditional lenders (such as banks and credit unions) can offer car loans to applicants who have poor credit history; although, these can be a lot more difficult to be approved for. These types of personal loans tend to come with much higher interest rates than regular car loans, because the lender is taking a risk by loaning you money.
When applying for a car loan with bad credit, you might want to consider whether the amount you’ve requested is suitable for your situation. Things like the type of car you want and how you plan to repay the loan are big factors when it comes to getting approval for a car loan.
Importantly, you should be upfront about your bad credit score when you apply for a car loan. By understanding your credit score, you can work on improving your overall credit report and increase your chance of approval, helping you buy a car.
What is a bad credit car loan?
A bad credit car loan is an option for people who, due to their poor credit history, are unable to secure a car loan from traditional lenders. They tend to have the following characteristics:
- Higher interest rates;
- Higher credit fees and charges;
- Longer loan terms (more time to repay the full loan, which increases how much interest you pay);
- Higher deposit on approval.
A bad credit car loan can be beneficial, but it’s important to understand exactly what you’re applying for. There are a number of online loan calculators available, including our handy car loan calculator. These tools help you figure out how much you’ll be repaying per month, and whether your budget is realistic.
Keep in mind that bad credit car loans can come with a number of ‘hidden costs’ – such as credit fees, car registration, car insurance, and account keeping fees. As such, it’s important to check the terms and conditions to make sure you’re aware of what you’re paying for.
A handy tip:
If your bad credit car loan monthly repayments are greater than your available budget, you can ask to contribute a larger deposit or opt for a longer loan term. These actions can make your repayments more manageable.
If you’re applying for a bad credit car loan, check that you meet the eligibility requirements first. Without meeting these requirements, your application may be rejected. These requirements generally include the following:
- Be over 18 years of age;
- Have stable employment (and therefore a regular income);
- Have a stable place of residence;
- Have the minimum deposit required on application;
- Ask for a sensible loan amount, considering the type of vehicle you’re wanting to buy;
- Have a recent credit history;
- Have proof of timely repayment (such as recent bank statements).
Tips to improve poor credit score
If your current credit score is low, you might be wondering how to improve it. Not only can improving your credit score make it easier for loan approval, but it can also secure your financial footprint for the future.
It’s important to understand that there are a number of simple ways you can improve your credit score. These include the following:
- Pay your utility bills on time each month/quarter;
- Pay your credit card bill on time each month (either in full or above the minimum repayment);
- Pay your rent or mortgage on time;
- Limit the amount of applications you make for credit;
- Lower your credit card limit;
- Check your credit report for any inaccuracies including incorrect debt information, fraudulent activity, and inaccurate recording of repayments.
By doing these things, you can start to build a good credit history and become more financially attractive to loan providers. In Australia, Comprehensive Credit Reporting (CCR) ensures all of your financial behaviour is recorded on your credit report, including any positive behaviour you have introduced to improve your credit rating. However, you’re unable to remove any information, even if it is negative — including:
- All payments made over the last two years;
- Payments of $150 or more that are overdue by 60 days or more;
- All applications for loans.
According to Moneysmart, the majority of this information is recorded on your credit report for five years.
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Written by Katie Francis
Katie Francis is a Content Intern at Jacaranda Finance. She is currently studying a Bachelor of Business (Marketing)/Media & Communications at the Queensland University of Technology.