Securing a loan to help buy a car has become increasingly popular in recent times, allowing all types of people to get behind the wheel. However, the cost of purchasing a new or used car is often rather hefty, which is why many of us prefer the idea of offsetting some of the financial burden via fixed monthly instalments.
Before applying for any sort of loan, we must consider our current credit rating and how it may affect our ability to be granted finance.
Read more to understand the importance of building up a steady credit rating and what things you can do to improve it before going down the car loan route.
Why is your credit rating important when applying for a car loan?
In most circumstances, the better your credit score, the more likely you are to be offered a car finance contract and the more positive the terms of that loan will be. Credit ratings are used by providers to evaluate how “safe” you are perceived to be, in order to protect themselves and minimise their chances of lending to “risky” individuals who will not meet their monthly repayments.
By looking at your credit history, finance lenders and brokers can conclude whether you are likely to be able to pay back your obligations based on past financial behaviour. By digging deeper and taking a look at certain areas, such as the number of times a person has applied for credit (whether for a vehicle or otherwise), if payments are made on time, and whether there is a large amount of outstanding personal debt, the finance provider can deduce whether that person manages their debts well or poorly.
That being said, many modern finance brokers and lenders will be willing to offer , taking applicants from a range of backgrounds and individual circumstances, including those with no credit at all, CCJ’s, arrears and more. While not ideal, there are a whole host of potential reasons as to why a person might have a weak or non-existent credit rating, and certain lenders are aware of this and may be willing to take into account a range of other elements when deciding whether to grant someone a car loan.
That is not to say that such a loan will be on favourable terms though, and those with poor ratings may find themselves on the receiving end of a contract with high-interest rates and poor terms. Others may have their applications rejected altogether, which is why improving our credit scores prior to applying for any type of loan is extremely beneficial.
What steps can you take to improve your credit rating?
Improving our credit score does not happen overnight, and many people spend years working towards their ideal credit level. Although this might not be realistic for everyone, there are several easy things you can do to improve your rating over time.
- Get listed on the using your current UK address. This includes people who are renting, sharing a flat during university, or living with family members.
- Ensure all bills and credit are paid in full and on time.
- Having no credit also affects your ability to be granted loans, so you should start building your credit up as soon as possible. Monthly phone contracts, normal household bills and paying off a credit card are all easy ways to steadily build your credit – just be sure to pay them back on time!
- Avoid applying for other types of credit within six months of making a finance application.
- Make sure that any company checking your current credit will do so using a ‘soft search’ since ‘hard searches’ will be visible on your credit report and can lower your score.
Final words of advice when applying for car finance
Before you even think of applying for a loan, you should carry out a significant amount of research to determine the likelihood of you being accepted. Your credit report can help you identify any problem areas and allow you to attempt to rectify them.
You can also approach a loan broker to establish which loan types would be available to you based on your circumstances, and what the monthly payments would be. This will help you determine if you currently have the means to make the payments. You should NEVER enter into a loan contract unless you are certain you can meet your financial obligations.
If you have applied for car finance and you are refused, then you should address the issues on your credit history that led to your rejection. Moreover, just because you were refused finance from one lender, does not mean a different lender will also reject your application. All lenders have different terms and shopping around is often the best course of action.
Be aware, though, that making multiple applications in a short space of time will signal alarm bells to lenders and is also not great for your overall credit. It is much more sensible to hold back and apply again when you are sure your credit history is in a better state of affairs.