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Bad credit car loans in Australia: How they work
It's still possible to get a car loan with bad credit in Australia.
In fact, there are plenty of lenders in Australia who specialise exclusively in offering bad credit car loans.
The finance itself works similarly to a standard car loan: You borrow a set amount and pay it back over a fixed period, usually with a fixed rate of interest. The car you’re buying is used to secure the loan. This generally makes it cheaper than an unsecured bad credit personal loan.
But bad credit car finance has some key differences you should know about:
- Higher interest rates and fees than standard loans.
- Potentially a limit on the amount you can borrow (imposed by the lender to mitigate their risk).
- More information and documents required by the lender to support your application.
- In some instances, you may need to make a deposit
Bad credit car loans comparison
- Average interest rate of 17.86% (versus 12.08% for all car loans)
- Average loan amount of $22,903 (versus $34,827 for all car loans)
- Average age of car purchased is 4.9 years (versus 4.2 years for all car loans)
Rate analysis correct as at February 2024 based on lenders on Money's database. Loan averages based on a sample of more than a thousand bad credit car loan requests received from Money customers.
Who offers bad credit car loans?
There are around a dozen specialist lenders in Australia offering loans for bad credit customers.
Bad credit lenders are experts at dealing with borrowers with lower credit scores, people with paid and unpaid defaults, as well as those with no credit history.
By contrast, most of the big retail banks (the likes of CBA, Westpac and large credit unions) won't accept applicants with bad credit.
But not all bad credit is created equal. Specialist lenders will pay attention to the reasons someone has bad credit before when assessing their application.
Lenders generally don't use the term ‘bad credit car loan’. Instead you may see descriptions such as ‘impaired credit’ or ‘below average credit’ to indicate that bad credit borrowers will be considered.
You can get a car loan with CERTAIN types of bad credit
If you have defaults on your credit history, lenders would prefer that you have paid those defaults off. Or you’re making progress to pay them off, even if your credit score hasn’t fully recovered yet.
Defaults for large amounts are a more serious issue for lenders compared to low-value defaults. The type of default matters too.
Types of credit defaults explained
Financial defaults
Like missing payments on a loan or credit card or buy now pay later account. These are a potential red flag for lenders.
Non-financial defaults
This includes the likes of missed gym membership payments or telco bills. These are generally not as problematic in the eyes of lenders.
What’s happening with your credit now is also important
Shaun McGowan, Loans Expert
A bad credit score reflects the past. But things can change quickly. You may have started a new job, repaid other debts and been keeping up with all your commitments. A specialist lender will take that into account. Remember, too, that your credit history is just one part of a car loan application.
Shaun McGowan, Loans Expert
Are you eligible for a bad credit car loan?
What lenders want to see
- You’re over 18 years old
- You’re an Australian citizen or permanent resident
- You have a regular, stable income
- You can show that you will be able to afford the repayments (based on your income and other expenses)
- You are consistently repaying any existing loans or credit cards
- If you were previously bankrupt or subject to a part IX debt agreement, you must be discharged from it for at least 12 months
- Lenders will also take a detailed look through your credit history to check for any unpaid credit defaults.
Potential issues for lenders
- You have large unpaid defaults.
- You’re currently bankrupt or you were discharged less than 12 months ago.
- There’s evidence of bad bank account conduct (missing payments, going into negative regularly).
- You’re having trouble keeping up with repayments on existing loans you may have (or credit cards).
- You have moved jobs or address frequently in the lead up to your loan application.
- Your bank statements show too much gambling.
Applying for car loan pre-approval can also be a good way of finding out if you're eligible and how much you can borrow, before going ahead with a full application.
How do you find the best bad credit car loan?
Some applicants with bad credit may be ready to settle for any loan they can get approved for. Doing this could be a very expensive choice in the long term.
You should still compare options and look for:
1
The lowest interest rate you’re eligible for
This may not be the headline interest advertised by a lender. You'll need to get a personalised quote to know what your actual rate may be.
2
Combined with the lowest fees
The comparison rate factors in fees along with your interest rate. Note, fees are generally added to your loan amount and you'll be paying them off (with interest) over the loan term. And remember, fees may negotiable. Always ask if the fee can be lowered? Some lenders would rather lower a fee than lose a customer.
3
The ability to make extra repayments
Plus being able to pay off the loan early (or refinance it) without penalty. This could also allow your to refinance your loan if you become eligible for lower rates during the loan term.
4
The shortest loan term you can afford
Bearing in mind the regular repayments will be higher with a shorter term.
Best bad credit car loans comparison (savings potential)
| Bad credit car loan A | Bad credit car loan B | |
|---|---|---|
Loan amount | $30,000 | $30,000 |
Interest rate | 18% | 15% |
Upfront fee | $900 | $450 |
Loan term | 5 years | 4 years |
Total to repay | $47,079 | $40,677 |
Saving | -$6,402 |
How to apply for a bad credit car loan step-by-step
1. Check your credit score and report
This will tell you your current situation and give the opportunity to fix errors in your credit report if there are any.
2. Pay off any unpaid defaults
Settle any outstanding credit defaults and stay on top of your current obligations in the lead up up to your application.
3. Get you bank statements into shape
Make sure your last 3-6 months of bank statements are looking healthy before applying: spend within your means, avoid gambling and don’t take on any new debt.
4. Demonstrate you can afford the loan
Calculate what your regular loan repayment would be and consider putting that amount into a savings account for a few months leading up to your application.
5. Compare bad credit car loans through a broker
If you have issues in your credit history, getting guidance from a broker could save you a lot of time and money.
6. Make an application with the lender
Importantly, only apply with one lender once you are confident you’re getting a good deal and that you will qualify. Applying with multiple lenders could further damage your credit score.
7. Consider contributing a deposit
It may not be necessary, but paying 10-20% of the car’s value up front will send a positive signal to lenders and reduce risk for them.
8. Provide as much supporting information as possible
Be completely honest and open with the lender and provide all documents requested, including payslips (or other proof of income), bank account statements and loan/credit card statements.
A bad credit car loan doesn’t have to be a long-term solution
Shaun McGowan, Loans Expert
Even if your current situation means a bad credit car loan is your only option, it’s often possible to refinance the loan to a lower rate down the line if your credit has improved. For example, if you’ve been making the repayments consistently for 12 months, it could be worth taking another look at what rates you’re eligible for at that stage. Finding a bad credit car loan with no fees for repaying the loan early will be an advantage if you plan to do that.
Shaun McGowan, Loans Expert
How we help you find the best bad credit car loan
1. Let us know who you are and what you're looking for
A little bit of information goes a long way in helping us find the right loans for you.
2. We securely analyse your data against each lender
This process finds the best bad credit car loan offers that match your profile.
3. Get matched
You'll either see a range of qualified car loan offers, or a lending specialist will help you find your match.
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