How Credit Scores Affect Car Finance

There are several different types of car finance available if you’re looking to purchase a new vehicle, but whichever one you choose, an important part of the process will be getting a credit check. Finance companies want to know about your credit history so they can evaluate how likely you are to repay your loan. Below, we explain how your credit report affects your chances of getting car finance, the different types of loan available and what to do if your application is rejected.

How do credit scores affect car finance?

Credit scores are a tool used by lenders and credit reference agencies and can be used to give you an indication of how likely you are to successfully get a loan. Your Equifax Credit Score will not directly impact the decision a lender makes, but gives you an idea of how likely you are to be offered credit. Lenders may have their own credit score, which is based on various sources of information including your credit report, and plays a part in their decision-making process.

Your credit report is useful to lenders because, among other things, it shows them how consistently you have repaid loans in the past. If it shows missed payments or defaults, this might mean you’re less likely to repay the new loan. If you are already paying off lots of loans or are near to your total credit limit, this might indicate you are over-reliant on credit.

A lender will use the information on your credit report, along with details on your application, to make a final decision. A healthy credit report is not the sole factor, but can play a part in your chances of getting a loan.

What different types of car loan can you get?

There are a few different ways of getting finance for a car, some will be more suitable than others, so it is important to research the different options thoroughly before applying. A common way of funding a car purchase on credit is with a personal loan. A personal loan will be arranged through your bank or building society and can vary in terms of repayment period and interest rate. The terms will depend on the amount you need to borrow and the strength of your credit history.

The monthly repayments for a personal loan might be higher than other forms of finance, but the total amount paid will often be less than other methods. A personal loan means you will own the car outright, once the money has been handed over, and the debt you owe will be to the bank or building society. Personal loans may not always be the cheapest option and can be difficult to get if you have limited credit history.

Hire Purchase (HP) is a fairly straightforward finance agreement where, after an initial deposit, monthly payments are made over a fixed period. You will not own the car outright until the final payment has been made, so if you are unable to keep up repayments you would also lose the car.

A more popular form of Hire Purchase is Personal Contract Purchase (PCP). It’s more complex than a traditional Hire Purchase as the monthly payments relate to the depreciation of the car’s value. It still starts with a deposit and a fixed term, but if you want to keep the car you will have to pay what is sometimes called a ‘balloon’ payment at the end. This payment equates to the minimum future value of the car.

What happens if you’re refused credit for a car?

Before you even apply for car finance, you should research how likely you are to get the loan. Checking your credit report can let you know if there are any recent issues that may be a problem for lenders, and also give you the chance to update any missing information. You should also work out what the total monthly payments are (including fees and interest) and then budget how you will be able to make the payments.

If you apply for finance and are rejected, then you may need to identify and address any issues with your credit history. Make sure you are registered on the electoral roll, so that lenders can verify your identity, and pay off outstanding debts where possible. If you have missed payments, defaults or even County Court Judgements (CCJs), it may take a while for your credit history to improve.

It can be worth shopping around, as being refused credit by one lender won’t mean you’ll be rejected by all of them, however, multiple credit applications in a short space of time can send a troublesome signal to lenders. It might be better to wait until your credit history is in better health, before applying again.