Bad Credit Car Loans
What is a bad credit car loan?
Bad credit car loans - also occasionally called ‘second chance car finance’ - is a loan specifically designed for people with a poor credit history or bad credit rating.
This includes people who have listed defaults, paid defaults, discharged bankruptcy, and credit-related items of that nature.
Being in this position is certainly not the end of the world. Even if you have been decline by a bank for a car loan, specialist car finance is available, subject to approval criteria.
If you qualify, approval is usually quick and straightforward.
If you have been rejected in a conventional car loan application because of a poor credit rating, a bad credit car loan effectively offers you a second chance - and it can even help you repair your credit rating.
The interest rate on a bad credit car loan is typically higher than for conventional types of car finance, in line with the underlying perceived risk this type of finance poses to the lender.
Lenders and risk
The reason lenders assess applications based upon your personal data (such as your credit history data and bank statement data) is so they can determine the relative risk of a default, posed by different types of applicants.
Many factors are considered, but at the end of the day the process is fundamentally about risk assessment.
Applications deemed excessively risky are declined. Those that are approved are allocated interest rates that reflect, in part, the assessed risk.
Applicants representing the lowest risk to the lender are offered the lowest interest rates. For the balance of applicants, as risk increases, so does the offered interest rate.
How do I get approved for a car loan with bad credit?
You will need to provide evidence in the form of your financial statements (for example bank statements for savings accounts and credit card) plus your income (for example, recent payslips and employment history).
You may need to supply a letter from your employer concerning the duration of your employment with them, or your current employment contract.
You should also review your credit history and repair any inaccuracies contained in it (if any).
In Australia, there are four different credit bureaus:
- Dun & Bradstreet
- Tasmanian Collection Service
You can check your credit rating and history for each of them here:
Your documents and related information will be used by a specialist bad credit car loan lender to build a picture about you which determines whether you qualify for a loan. It will be used to assess the lender’s perceived risk in lending you the funds. (This ultimately affects the interest rate offered in a bad credit car loan.)
Together with your credit history, your bank statements and payslips can be used as evidence that you have the earning and savings capacity to pay back the loan.
You will generally need to demonstrate that you have sufficient surplus disposable income to service the proposed debt, after taking into account the costs of living (rent/mortgage payment, and other living expenses, etc.)
In providing this evidence to support your application it’s extremely important to be honest and authentic about your current financial and employment position.
Answer all questions honestly and make sure documentation you supply accurately reflects the truth as it currently stands.
Lenders like to minimise risk, and attempts to misrepresent your financial position in an application are a significant red flag to any lender considering your application.
(Occasionally applicants attempt to make their application by ‘fudging’ the figures in what they consider to be little more than minor ways, in an attempt to make their applications more deserving of approval. Doing this, even in a minor way, can, and generally does, backfire.)
Recent evidence of paying off outstanding debts and current debts (such as repaying your credit card on time or early) is always going to be reviewed favourably. This demonstrates to the lender that you take your financial responsibilities and obligations as a borrower seriously, and you have the funds available to service your existing debts.
In some situations it may be advisable to consolidate a number of outstanding debts into the one overall loan, and concentrate on repaying that as quickly as possible.
You may then use that repayment history as evidence of your ongoing financial responsibility.
It’s often helpful to speak with a financial expert at the outset, with a view to arranging your finances so that they reflect a position that a lender will look favourably upon.
Credit rating repair
Although the interest rate and approvals process for a bad credit car loan may be seen something of a burden, it’s also possible for you to view it as the first positive step in repairing your credit history.
Any future lenders will note your repayment history for this loan and use that history as a key part of any decision to approve additional finance in future.
It may, therefore, be prudent to borrow less over a shorter term, and service that debt punctually, in an effort to accrue evidence of financial stability and rebuild your credit profile. For example, you could choose a Hyundai i30 over 18 months instead of a BMW 1 Series over 60 months.
Choose a Hyundai i30 over 18 months instead of a BMW 1 Series over 60 months...
A bad credit car loan used in this way, and repaid on time each month, can certainly be viewed as a stepping stone on the way to achieving a better credit outcome in future.
What security is required?
Generally, a bad credit car loan is secured by the vehicle purchased. In other words, the lender is entitled to take possession of the vehicle in the event of a default, in order to sell it and recover the balance of funds owing.
The loan amount can be 100% of the value of the vehicle.
In many cases the loan amount can be as much as 100 percent of the value of the vehicle. However, because the loan is secured by the vehicle it may not be possible for the borrowings also to include additional costs such as stamp duty, registration and insurance.
(This is because in this case the debt would be greater than the value of the asset securing it.)
Each applicant’s case is different, however, and in some cases additional security may be required, such as a guarantor. Alternatively, a cash contribution to the vehicle’s purchase up front may be required as a means for the lender to reduce risk.
How long will my application take?
Specialist bad credit car finance lenders are experts at assessing applications against established approvals criteria. If you meet the criteria, approvals are typically quick. In some cases, you might even be approved on the same day as you lodged your application.
If you are not used to this process it may be worthwhile speaking to a specialist in this kind of finance at the outset - for example a specialist bad credit car finance lender, or a specialist finance broker - who can provide valuable guidance about arranging your affairs in a manner that expedites the approval of your application.
Is finance available for new and used cars?
Bad credit car finance is generally available for both new and used cars - but in many cases the interest rate is often higher for used cars owing to their lower retained value over time - which increases risk to the lender in the event of a default on the repayments.
I am a business owner with bad credit. What do I do?
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.
Speak to your financial advisor to determine the most suitable lending structure for your particular business situation.
What if I have defaults on my credit history?
If this is not possible, and there remain outstanding defaults on your credit record, speak to a specialist bad credit car loan provider because in some situations it is possible to approve your application despite having an unpaid default on your credit history.
If finance is approved in this situation, the interest rate payable is generally higher, in line with the risk perceived by the lender.
What if I have declared bankruptcy?
If you have been discharged from your bankruptcy, or you are an ex-bankrupt you are eligible to apply for a bad credit car loan. The interest payable in these cases is often higher in this situation, but car finance is generally possible if your bankruptcy has been discharged.
If you have not been discharged from your bankruptcy, unfortunately, you are ineligible for a car loan. (Some lenders may offer a ‘no credit check car loan’ - but these are often not a traditional loan and work more like a car hire/rental and are expensive in terms of the interest rate..)
If you have not been discharged from your bankruptcy, unfortunately, you are ineligible for a car loan.
What about Part IX debt agreements?
Part IX debt agreements are a legally binding agreement with your creditors, often used as an alternative to declaring bankruptcy. These agreements are overseen by the Australian Financial Security Authority and represent a formalised way to repay any outstanding debts.
Part IX (or Part 9) agreements are included in your credit history and are generally perceived by lenders as a highly negative aspect in your loan application.
In general, finance is available to applicants who have been discharged from a Part IX agreement for at least 12 months, and who have in that time demonstrated responsible financial behaviour as well as been in regular, paid employment and are able to demonstrate disposable income capacity in line with servicing the debt.
Can finance be pre-approved?
Generally, bad credit car finance can be pre-approved. This allows your application to be reviewed and approved, so that you know how much you may spend on a car at the outset. You may them go out and locate a suitable car in line with your budget.