5 Options for Bad Credit Financing for Cars

Posted Monday, May 29, 2023

Managing the confusing world of auto finance can feel like a daunting task when you have a less-than-ideal credit score. You will understand the struggle of financing a car if you have had a loan application denied due to poor credit. Right?

Bad credit is just an obstacle on the way to getting a new car. It does not have to be a roadblock. There are options available for bad credit borrowers that you could use to finance your car. In this article, we have listed some of the best options for bad credit financing.

Bad Credit Financing for Cars


1. Hire Purchase (HP)

A Hire Purchase (HP) agreement is a popular type of financing option for many people wishing to purchase their own vehicle. With this option, you will have to bear an upfront deposit that is mostly 10% of the value of the vehicle. Then, monthly payments are made over a fixed term. This duration can range anywhere from 1-5 years and you incur the costs of the car as well as the added interest.

The car is not officially yours until you make the final payment, which is often referred to as a 'transfer fee' or 'option fee'. Once this payment is made, you get sole ownership of the car.

HP agreements are typically easy to understand and set up, making them a reasonable choice. Nevertheless, you must consider interest rates and the lender’s requirements because they might vary.

Overall, HP agreements can be a good option for you if you have bad credit and can’t get financing through other options. It is important to carefully consider the terms and conditions before signing up to any finance agreement.

2. Personal Contract Purchase (PCP)

A personal contract purchase (PCP) agreement works similar to an HP, with an initial deposit followed by fixed installments per month. It usually lasts for 24-48 months. The amount that you incur monthly is specified via certain parameters.

These include the price of the vehicle, the Annual Percentage Rate, and the expected depreciation that your vehicle will go through during the contract. The PCP agreement will also outline a stipulation that contains the maximum yearly allowed mileage on your car. If the mileage goes beyond that limit, or the car undergoes severe damage, the lending party can impose additional charges.

The major advantage that PCP agreements offer is that they are flexible when the contract ends. You can return the vehicle without any questions asked and you can also use any positive equity as a balance to finance a new car.

3. Personal Contract Hire (PCH)

Personal Contract Hire (PCH), sometimes known as car leasing, is similar to car rental. Once you give a deposit and consent to make fixed monthly payments, you will get a car to drive for the duration of the contract. In addition, you will be responsible for any damage that occurs during the leasing time other than ordinary deterioration.

Usually, two to five years are included in a car lease arrangement, and the initial deposit is up to six times the amount paid per month. Typically, contracts with longer terms have cheaper monthly payments.

PCH is different from PCP because it warrants that you return the car. The benefit of the agreement is that you can enjoy riding a new car without the lengthy commitment associated with ownership. The monthly payments are also lower for PCH.

4. Personal Loan

Getting a personal loan for car financing is a great way to acquire your dream car. Personal loans typically offer a set amount of money that can be paid off within the time span of 1-7 years. The monthly payments given for personal loans include the original borrowed amount with varying amounts of interest depending on the borrowed amount.

When you use a personal loan for purchasing a car, you are a cash buyer, which gives you the power to push for a lower rate on the vehicle. You can talk to dealerships or individual sellers, knowing precisely the amount you will be able to spend.

This option also gives you better negotiation leverage because you are not reliant on dealer financing or constrained by particular automobile models or dealerships. If you decide to get a personal loan to finance your car, make sure to verify the interest rates and loan terms for the best deals. It is also important to do extensive research into additional costs such as loan origination or early repayment fees.

5. Guarantor Loan

You can also finance your car using a guarantor loan. In this type of agreement, a relative or friend with strong credit offers to guarantee the loan, thereby serving as a co-signer. Lenders may be more likely to lend to consumers with bad or no credit histories since the guarantor commits to pay the loan installments if the borrower fails to do so.

Guarantor loans can be a realistic choice for individuals who might lack access to other types of credit or who have been turned down for loans. It is essential to note that guarantor loans demand a lot of confidence and accountability from both the borrower and the guarantor.

The guarantor will be held accountable and may suffer severe financial repercussions, including possible legal action, if the borrower fails to pay back the loan.

Final Thoughts

It is crucial to thoroughly weigh all the possibilities along with interest rates, costs, and loan conditions to ensure that you select the best option for your particular financial circumstances. Regardless of the type of financing you select, it is essential to pay your debts on time and try to raise your credit score to secure better-borrowing terms in the future. It is possible to own a car despite having terrible credit if you use the right options.