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Buying a new or used car is a big investment, often setting us back thousands of pounds, which is why a large number of people choose to purchase using car finance in the UK. This helps to offset some of the cost by paying it off in monthly instalments. However, to be approved for a car loan, you must consider your credit score and the impact it will have on your interest rate or whether you will be accepted altogether.
Here, I discuss the importance of having a good rating and the things you can do to improve it before buying a car on finance.
How does my credit rating affect my loan application?
Generally speaking, the higher your credit rating is, the better chance you have of receiving a car loan and the more favourable your lending terms will be. This is because your credit score determines how “safe” you are perceived to be as a borrower – the lender is simply trying to cover their back, rather than lending to those “risky” individuals who may not be able to make their monthly repayments.
Your credit history allows the finance provider to determine your ability to pay, based on your past financial and credit behaviour. From your history, they can infer whether you are good or bad at managing debts. As such, loan providers look at things such as how many times you have applied for credit, if your payments are always made on time, and whether you have any outstanding debt.
That being said, there are lots of modern car finance providers who will consider applications from all types of people, including those with poor or no credit. There are a plethora of possible reasons as to why someone might not have the best credit score, so some lenders will be willing to take into consideration a range of other factors when deciding if they should grant you a loan.
However, having a bad rating means you are likely to be offered a loan with poor terms, high interest rates, or simply be rejected by certain providers altogether, so it’s wise to improve your score if possible.
How can I improve my credit score?
Though it might not be ideal for some people, entering into a car finance contract with the best credit score possible is the preferred option and there are several ways you can improve your score over time. Unfortunately, none of these are quick-fix methods, and improving your rating takes time.
- Ensure you are listed on the electoral register at your current address. This includes rentals, shared flats or when living with your family.
- Always pay bills or credit on time and in full.
- Try to build up a good credit history, as having no credit could mean being rejected too. Doing this is simple and can include things like a mobile phone contract, household bills and getting a credit card.
- Do not apply for other credit within six months of when you applied for car finance (or other types of credit).
- Try to keep your credit utilisation rate at the lower end of the scale. A lower percentage is viewed more positively and normally means a better credit score.
How do I manage my car finance?
Once you have built your credit rating and have been approved for finance, it is extremely important to manage your repayments in a sensible way, as not doing so can bring your credit rating right back down and could mean you do not get accepted for finance in the future.
That being said, there are several things you can do to help manage your car finance:
- Always pay back your monthly instalments in full and on time so as to avoid any negative points on your credit report. This is a key takeaway and means you should NEVER enter into a finance agreement that you won’t be able to fulfil.
- It is wise to create a monthly budget, which lists your incomings and outgoings and shows you where you can cut costs, ensuring you are able to pay your loan back.
- A good idea is to set up a monthly direct debit your loan provider so that you don’t accidentally miss any payments.
- Do not take any other loans out while you’re paying off your car loan.
This is a collaborative post.