You can get a car loan with bad credit if you can demonstrate other positive financial behaviours that would suggest that you are a better credit risk than your credit file may indicate.
There are a number of non-bank lenders that specialise in bad credit car loans. However, they do not lend to everyone!
In this article, we will discuss how to position yourself to be approved for auto finance even if you have a poor credit history.
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What is Bad Credit?
Bad credit refers to the risk associated with lending someone money. Higher risk means a greater likelihood that a loan will not be repaid.
As a result, it will be more difficult to get a loan (but not impossible) and the cost of that loan will be higher.
There are a number of indicators that a lender will consider to assess when you have bad credit or are considered higher risk.
Low Credit Score
Your credit score is a reflection of past behaviour associated with your financial history.
This is not limited to borrowing money through products like personal loans, credit cards, or home loans.
It can also be affected by service-related products such as a mobile phone contract or a utility payment that was overdue for an extended period.
Your credit score is one of the first eligibility requirements that a lender will consider. If you are below their cutoff then you will often be rejected without further assessment.
This is why it is critical to know what lender to apply with if you have a low credit score. Engaging a car loan broker early in this process can help you find the lender who will approve your application.
Thin Credit History
It takes time to build a strong credit score. As a result those who are young and have not had a loan before, or those who are new to the country, can also be categorised as high risk.
This may sound unfair as they have not missed any loan repayments in the past to tarnish their record.
However, remember that a credit score is a predictor of future risk. If you have no history to measure, then the uncertainty equals higher risk for the lender.
Poor Financial Behaviours
The final reason that someone could be assessed as a high credit risk is if they are demonstrating risky financial habits.
As part of your car loan application, most lenders will review your bank statements. This will show your spending habits and how well you manage your money.
If you are reversing on direct debit payments, incurring bank fees, and going into a negative account balance, then this is a sign that you may be struggling to manage your budget.
Even if your credit score is high, and your record squeaky clean, this can be a problem for some lenders.
Common Reasons People Have Bad Credit
The most common reasons that people have bad credit is due to either missed repayments on previous loans or utility expenses or frequently using loan products that could indicate someone is struggling financially.
Missed Loan Repayments
If you miss a loan repayment and fall into arrears this will be visible on your credit file very quickly.
Australia has only recently introduced a system called Comprehensive Credit Reporting. As part of this system, lenders will report the current status of your accounts.
If a loan is in arrears it will be evident on your credit file. Even after you bring that loan up to date.
Payment Defaults
A more extreme mark on your credit file is a payment default. You will have missed a number of payments and neglected to engage with the lender to work out a plan to repay.
A payment default will remain on your credit file for five years. Once the account is repaid it is updated to show this paid status, but will remain there for the full five-year period.
Court Judgment
Even more serious is a court judgment. This means that a lender has taken you to court and obtained a judgment to attempt to recover the money from you through various enforcement measures.
As you can imagine, this is not a good look.
It will also remain on your credit file for five years.
Bankruptcy
There are many different forms of bankruptcy that indicate varying levels of resolutions to a debt problem.
The scope of which is beyond this article but you don’t have to be a genius to understand that this is going to limit your options for credit in the future.
However, not all is lost under any of these circumstances.
Use of Short-Term Loan Products
There are various services that are at your fingertips to help plug holes in your household budget.
However, if you use these frequently you can quickly destroy your chances of obtaining a car loan.
- Payday Loans
- Wage Advance
- Buy Now, Pay Later
One-off use of these services may be ok, but beyond that you will be heavily restricted and in many cases completely ineligible for credit. So tread carefully!
Will a Bad Credit Score Stop You from Getting a Car Loan?
You may be surprised to read that despite all of these possible negatives on your credit file you may still be eligible for a car loan. But it will be tricky!
You are going to have to be perfect on the choice of lender, and how your bank statements present.
It will be difficult to know how to achieve this without a broker in your corner. So click the button below to start a conversation with the expert team at Gusto Finance.
Some Lenders Approve Bad Credit Car Loans
Some non-bank lenders will still consider your application if you can meet their strict criteria.
There are only a few lenders who will consider these types of loans so your options will be limited.
Past problems can be overcome with positive recent behaviours.
Other Factors Lenders Consider
Aside from your credit history, a lender will also consider the following factors. If they are strong it may offset some of the negatives from a low credit score:
- Stability of income.
- Sound expense management.
- Savings that you have accrued.
- Improved recent repayment history on other debts
It all comes back to demonstrating that you can manage your finances well and are capable of taking on extra repayments comfortably.
How to Improve Your Chances of Approval (Even with Bad Credit)
Ensure All Current Loans Are Up to Date
If you are currently in arrears on any loans then no lender will approve a car loan for you.
You must be up to date before applying. Even if you have only just recently caught up on your arrears, you will have options.
But zero if still behind.
Do not use Wage Advance products
These short-term cash advances can be seen as a sign that someone is at risk of substantial hardship if they enter another loan.
You will need to stop using these products and allow 90 days to pass so they are no longer evident on the bank statements that will be scrutinised as part of your loan assessment.
Minimise use of BNPL
Buy Now, Pay Later services can inflate your debt load and make lenders wary of your financial habits.
The problem with these services is it is hard to know how much you really owe. So it would either slow down your application while you provide more information, or they will assume you owe more than you do and you could be declined.
Similar to the previous point, just avoid them for a period of time so it is not part of your assessment.
Ensure No Payment Reversals
Regular payment reversals are another sign that you are at risk of financial hardship.
A step you can take to prevent reversals is to schedule all of your regular payments for the day you get paid.
That way you stay up to date and your payments are made without a thought.
Save a Deposit
Saving a deposit for your car loan will have two effects on your application.
- It will demonstrate that you have surplus funds in your budget to afford the repayments on your new car loan, and;
- You can lower your loan size relative to the value of the car you are buying.
A lender will view this favourably and can strengthen your loan application even if you have a poor credit history.
Guarantor Loans
If you have bad credit, a guarantor can assist you access loan products that will be cheaper and more favourable.
However, your guarantor will be on the hook for the loan amount if you do not repay.
This can be a complex situation so for now just know that this is an option, but would be a tricky situation to navigate.
Pros and Cons of a Bad Credit Car Loan
Pros
- You can still get a loan if you need a car.
- You can start to rebuild your credit score if you keep up with repayments.
- You may be able to refinance to a better rate as your credit improves.
Cons
- The loan will be expensive – expect an interest rate in the 20%-30% range.
- Your maximum loan will be smaller.
- You can only buy a moderately priced car which may be less reliable.
How a Car Loan Broker Can Help
Our brokers have a working relationship with a number of lenders who specialise in bad credit car loans.
They know how to prepare a loan application to address the areas of concern to a lender and highlight where you have improved your situation.
They speak to people in these companies daily and are best placed to know where to send your application, what the deal breakers are, and how to best position your application.
So get in touch today and our expert team can get to work for you.
Conclusion
You can get a car loan with bad credit but it is going to be very difficult to get approved if you don’t know where to apply, or what they look for.
This article has provided you with some of this information but it is always changing.
For the most up-to-date industry expertise, a broker can be the difference between an approval and a rejection. So get in touch today!
