What is a Bad Credit Car Loan?
A bad credit car loan - also known as second-chance car finance - is a secured loan specifically designed to help people with a bad credit rating, allowing them to finance the purchase of a vehicle. Typically, they may often have a higher interest rate than secured car loans, and may also include higher initial or monthly fees.
In this guide, you’ll learn:
How does a bad credit car loan work?
A bad credit car loan works in a similar way to a secured car loan - a lender will approve an amount of money for a borrower to finance a car. The borrower will own the car and it will be used as collateral - i.e. security - on the loan. The borrower will make regular repayments to the lender until the total loan amount plus interest is repaid.
They will generally have higher interest rates and fees than a secured car loan. You can see how second-chance car finance compares to a secured car loan below.
|Secured Car Loan||Bad Credit Car Loan|
Who offers a bad credit car loan?
Most lenders who offer a secured car loan will also offer bad credit car loans. You may qualify for a car loan with many different lenders, though each will have their own pros and cons. As this type of finance is designed for individuals with poor credit history, it’s crucial that you find the best deal available to avoid any unmanageable future debt.
You can apply with:
- Car Dealerships
- Non-bank lenders
- Finance brokers
Brokers will often have access to a range of specialist lenders. As they understand the approval criteria for each, a broker can advise on which lender may be most suitable, and how to submit an application that will likely be approved.
How do I know if I have bad credit?
You can check your credit rating and history by contacting one of the credit bureaus in Australia. This is a good first step before applying for a bad credit car loan, as it will allow you to view and understand your credit history, and correct any inaccuracies - if there are any.
In Australia, there are three different credit bureaus:
- CheckYourCredit.com.au (Illion, formerly known as Dun and Bradstreet)
You can check your credit rating by contacting these credit bureaus and requesting a credit history report.
Bad credit covers more than just bankruptcy or a Part IX debt agreement. Some people may have bad credit without realising it. Lenders will look at all defaults on your credit file when assessing an application, which will include everything from unpaid telco bills to credit card defaults and more.
Bad credit can often be split into three categories:
- Non-financial defaults - i.e anything that isn’t a financial default or insolvency. This could be gym memberships, phone bills, or power bills.
- Financial defaults - i.e. credit cards or personal loans. Financial defaults are considered more serious than unpaid bills.
- Insolvencies - i.e. Bankruptcy and Part IX Debt agreements.
There are also two types of defaults: Paid and Unpaid. Paid defaults show you have made an attempt to clear your debt and are taking responsibility for your finances. Lenders may ask that you pay any unpaid defaults before granting approval on a loan - such as telco defaults.
Lenders will assess your application for a car loan based on the number of defaults on your credit history and their severity.
How to qualify
Whether you qualify for a bad credit car loan will depend on the number of defaults on your credit file, the severity of those defaults, and the total value of each. For example, an ex-bankrupt will be deemed higher risk than someone with a credit card default, who will be deemed higher risk than someone with just an unpaid phone bill.
Lenders will also look at the amount of each default, and the total value of all defaults on your credit file - a consistent track record of non-financial defaults with a high total value will make it difficult to get a low interest rate.
You can qualify if you are:
- Over the age of 18; and
- An Australian Citizen or Permanent Resident; and
- Are employed or have a regular source of income; and
- Have been discharged from bankruptcy or a Part IX for a minimum of 12 months; and
- Can show you are capable of taking on the debt and meeting your repayments.
Bad credit car loans are designed for individuals who have made mistakes in the past with their credit file, but have the ability to meet repayments on a future car loan.
Can I get a bad credit car loan if I am an ex-bankrupt?
Yes, you can get a bad credit car loan if you are an ex-bankrupt, and have been discharged from bankruptcy for a minimum of 12 months. You cannot apply if you are currently bankrupt. The amount of interest that will be applied to your loan will likely be higher than with other types of defaults.
Can I get a bad credit car loan if I am in a Part IX debt agreement?
You can qualify for a bad credit car loan if you have been discharged from your Part IX agreement for at least 12 months. Whether you are approved or not will depend on the individual lender criteria and your financial history in the time since you have been discharged.
You can improve your chances of getting approval after a Part IX by:
- Showing good financial behaviour - i.e arranging payment for all unpaid defaults and not having any defaults - paid or unpaid - on your file in the time since being discharged.
- Having regular, paid employment.
- Demonstrating an ability to earn and save enough money to meet your repayments.
A Part IX debt agreement is a legally binding agreement, often used as an alternative to declaring bankruptcy. It is included in your credit history and lenders consider a Part IX to be a very serious factor when granting approval.
What do I need to apply for a bad credit car loan?
The application process for a bad credit car loan is similar to a secured car loan. The main exception is that lenders will put greater consideration into your ability to repay the loan before granting approval.
When applying, you will still need to supply all documentation as you normally would when applying for a secured car loan, such as:
- Proof of identity - i.e. passport or driver's licence
- Proof of income - i.e such as copies of your tax return or recent payslips
- Proof of your assets - i.e any shares, vehicles, or property
- Details of any current debts and expenditure - i.e. rent/mortgage, other loans and credit card details
The most important aspects of the approval process will be demonstrating your ability to repay the loan, and that you have made attempts to clear any defaults on your credit file.
Bad credit car loans present a higher level of risk to a lender than a secured car loan, so may require bank statements or payslips up to six months.
How much can I borrow?
If you are approved for a bad credit car loan, you will be able to borrow the full amount of the vehicle price. However, your vehicle will act as security on the loan, and only the value of the vehicle will be taken into account when providing finance. This means that other costs - such as registration and insurance - may not be included in the loan amount.
Want to see how much your loan may cost? You can use our free car loan calculator to see estimated monthly repayments on a car loan and the total interest you might pay over the term.
Minimum and Maximum Amounts
|Minimum Amount||Maximum Amount|
The loan amount can be 100% of the value of the vehicle. The maximum amount you can borrow will be entirely dependent on your current financial profile.
Bad credit car loan rates
Bad credit car loan Interest rates - and establishment fees - will be higher than a secured car loan. Currently in Australia, interest rates range between 12.95% and 29.95%, while the fees you pay will vary depending on your lenders. The car loan interest rates applied to second-chance car finance will also be determined by the age of the vehicle.
Loan amount vs Vehicle age vs Rates
|Lender 1||Lender 2||Lender 3|
|Vehicle Age||Brand-New||Used - 2 years old||Used - 5 years old|
Important: This is an example and actual rates may differ.
Older vehicles are at greater risk of mechanical fault and other issues - the older the vehicle you wish to finance, the higher your interest rates will be.
What is the term?
In Australia, car loans are typically offered for 5 years. Some lenders may offer car loans for up to 7 years. When deciding on a term for your bad credit car loan, you’ll pay the least amount of interest if you choose the shortest term possible. With longer terms, a greater percentage of your initial repayments will be used to repay the interest instead of the principal.
Minimum and Maximum Terms
|Minimum Term||Maximum Term|
|3 years||7 years|
What fees will I pay?
The fees you pay on a bad credit car loan will depend on your lender. Brokers are often paid a commission or brokerage fee for processing the application and settlement of a car finance agreement - this is paid by the lenders, not you. Banks or non-bank lenders will often charge their own administration or set-up fees, which will be unique to each lender.
A bad credit car loan is a secured car loan that is suitable for individuals who are dependable and prove they can act responsibly despite poor credit history. As the borrower, you will need to ensure you are comfortable with the loan amount and your ability to meet your repayment obligations.
In summary, these loans:
- Are similar to a secured car loan
- Are available from a range of different lenders
- Provide access to finance for ex-bankrupts or those discharged from a Part IX
- Have higher fees and interest rates than a secured car loan
Pros and Cons
Bad Credit Car Loans FAQ
What kind of cars can I purchase with a bad credit car loan?
The kind of vehicles you can purchase with a bad credit car loan will be the same as you would be able to with a secured car loan. This includes new and used vehicles, and vehicles acquired through private sale. For the lowest interest rates, you should try to finance the newest model of car you can comfortably afford.
Can I apply for a bad credit car loan through my business?
Bad credit car finance is available to businesses - but often it is better to structure any finance as a chattel mortgage or a commercial hire purchase agreement. These specialist finance structures are designed specifically for businesses and typically offer significant tax advantages for businesses.
How long does it take to approve a bad credit car loan?
If you meet the criteria for a bad credit car loan, a broker or non-bank lender can typically have an approval completed within an hour. Once approved, the funds should be made available within 24 hours.
Can I get a car loan if I have defaults?
Yes, but in some instances, lenders will advise that you may need to pay any outstanding defaults before granting approval for a bad credit car loan.