What credit score do you need for car finance?

No minimum credit score guarantees approval for car finance. A higher credit score indicates lower risk, meaning you're more likely to repay lenders. While a low credit score may present challenges, it doesn't mean you will be denied car finance.

Different finance providers use various credit reference agencies, which can lead to differing scores across lenders. They also consider additional factors beyond your score, allowing for a more comprehensive evaluation of your application. A low credit score alone won't disqualify you from obtaining car finance.

What is a credit score?

Your credit score indicates your ability to manage credit responsibly and reflects how likely you are to be a reliable borrower. Credit reference agencies calculate your score using information from your credit report, which includes details about past credit agreements, your payment history, and other relevant financial data.

Lenders see a higher credit score as lower risk, while a lower score signifies greater risk. This score is crucial in determining your chances of securing finance and the terms of any loan you apply for, including car loans and mortgages.

Since your credit score can significantly affect your financial options, it’s essential to monitor and maintain a healthy credit report actively.

How does it work?

In the UK, three credit reference agencies (CRAs)—Experian, Equifax, and TransUnion—calculate your score differently. Each lender defines a good score uniquely, which is why no single number guarantees car finance approval. Below, you’ll find a list of the CRAs' scores and their rankings.

Higher scores lead to lower rates and better credit terms. If you have poor credit, you can still secure a car loan, but expect higher rates and stricter conditions. Understanding these nuances can help you navigate your financing options effectively.

What affects your credit score?

Many people encounter financial challenges, from missed payments to issues like divorce, which can negatively impact their credit score.

Here are some key factors that can influence your score:

• Maxing out your credit limit or relying too heavily on credit
• Entering an Individual Voluntary Agreement (IVA)
• Having limited or no credit history
• Defaulting on a loan
• Undergoing a hard credit search
• Submitting multiple credit applications in a short period
• Mismanaging your overdraft
• Receiving a County Court Judgment (CCJ)

Lenders consider this information when assessing your eligibility, which may make securing credit more difficult. However, it’s not impossible to improve your chances!

Will having car finance affect my credit score?

Yes, taking out car finance will impact your credit score. The lender conducts a hard credit check before approving your deal.

Once your agreement is in place, your repayments are reported to the credit reference agencies (CRAs). If you make payments on time, your credit score may improve. However, missed payments will negatively affect your score.

How is car finance affected by your credit score?

Your credit score reflects your financial history. Lenders use it to assess your reliability and the likelihood of repaying a loan.

A high credit score boosts your chances of securing car finance. With an excellent score, you can access low-interest rates, minimal down payments, and lower monthly payments. In contrast, a low credit score leads to higher interest rates and larger deposit requirements, resulting in greater overall costs for the same loan.

Car finance also impacts your credit score. When you apply for a loan at a dealership, it triggers a hard inquiry with the credit reference agency, which can reduce your score by 5-10 points for about a year.

If you apply for loans with multiple dealers within a short period (up to 45 days), these inquiries are treated as one request. This slight dip in your score typically won’t affect loan terms if you have a high score. However, if your score is near the Good/Excellent or Poor/Fair boundary, it can significantly change your lending conditions.

After securing car finance, your credit score may drop slightly. It will recover as you make timely payments. Consistent repayment without missed or late payments will gradually improve your score.

What are the types of car finance?

The main types of car finance in the UK are:

1. Hire purchase

With hire purchase, you pay a deposit and make monthly payments until the total loan amount, including interest, is settled. Once you complete the payments, you become the car's owner.

2. Personal contract purchase

Personal contract purchase is similar to HP but features lower monthly payments. During the agreement, you pay only the difference between the car's initial price and its estimated value at the contract's end, accounting for wear and tear. You can return the vehicle at the end of the term or make a “balloon payment” to take full ownership.

3. Personal contract hire

With personal contract hire, you pay an initial deposit and monthly payments, but you cannot own the vehicle. At the end of the contract, you must return the car to the seller.

4. Personal loan

A personal loan allows you to borrow money from any lender to cover the full cost of the car. This option gives you the freedom to purchase from any seller while making monthly repayments to your lender.

How to improve your chances of getting car finance

Purchasing a car is a significant investment, so take it seriously. If you need a loan, pay extra attention to your choices.

Choose the right car at the right price, and understand your budget. If you're unsure of your credit score, consider the potential challenges you might face with car finance if your score is low.

Choose the car carefully

When selecting a car to finance, evaluate your needs, preferences, and repayment capacity. Lenders view certain cars as riskier for financing, so confirm that a loan is available for your chosen vehicle.

Check and improve your credit score

Check your credit score to assess your chances of securing car finance. This service is free and helps you prepare for your loan application.

If your score is just below the threshold for a higher category, you can take steps to improve it and qualify for better loan terms. Remember, though, that significant improvements may take at least six months.

Compare your desires and abilities

Choose a car that fits your budget, ensuring you can comfortably cover monthly loan payments for several years. Check your income and expenses to understand your financial capacity.

Factors in car finance approval

A credit score is the main and primary indicator of the borrower's estimation. The following factors are also of great importance and are studied by lenders.

1. Your credit history

Your credit history is crucial in assessing how you manage borrowed funds. It includes all the loans and credit products you've had, along with your payment history. This information helps lenders understand your financial behaviour and your likelihood of repaying a car loan.

2. Income and expenses

Your income and expenses are critical indicators for lenders. They compare your monthly income with your expenses to assess your ability to repay a new loan. Ensure that your income exceeds your expenses by more than the estimated monthly payment.

3. Debt-to-income ratio

This ratio compares your monthly loan repayments to your income, typically expressed as a percentage. A lower debt-to-income ratio is more favourable, as it shows you can manage additional debt responsibly.

4. Credit utilisation ratio

The credit utilisation ratio indicates how much of your credit limit you use. This metric helps lenders gauge your reliance on credit. Aim for a credit utilisation ratio of around 25% or less, as this is generally viewed positively by lenders.

5. Your residential stability

Your residential stability reflects the consistency of your living situation. Lenders prefer borrowers who demonstrate stability, as this indicates a higher likelihood of full and timely loan repayments. If you frequently move, lenders may view you as a riskier borrower. Stability in your residence can enhance your appeal to lenders and improve your chances of securing car finance.

Is a good credit score a must to buy a car?

Buying a car with a loan is a serious process, and your credit rating plays a crucial role for both you and the lender.

According to FICO, over 60% of car loans go to borrowers with a score above 661 (Good and Excellent). A higher score increases your chances of securing financing and helps you receive better terms. When you have a strong credit rating, both you and the lender benefit.

So, can I get car finance with a low credit score?

Yes, you can. Some lenders offer car finance options specifically designed for individuals with poor credit.

While these deals may come with higher costs, there are several strategies to keep expenses down:

• Choose a more affordable car  or one that retains its value better.
• Select a longer loan term  to reduce monthly payments (though this means you'll pay more interest overall).
• Make a larger deposit  to lower your monthly payments.
• Consider a guarantor  to enhance your application.

Carplus assists thousands of individuals each month, including those with missed payments, County Court Judgments (CCJs), or Individual Voluntary Agreements (IVAs).

We recognise that a low credit score doesn't eliminate the need for a reliable vehicle. That's why we take a comprehensive approach, considering your credit history and overall affordability to help those who have been turned away by other lenders.

Use our car finance calculator to explore your options. Simply enter the amount you wish to borrow, the desired loan term, and your credit score to see what your agreement could look like