It’s a dilemma faced by many families who are living from pay check to pay check, have had trouble repaying credit in the past and are in need of a car, but don’t have the funds to pay for one outright.
Whether it’s to get the kids to school, for the commute to work or you simply live in a rural location and need a car in order to bring you within reach of shops and other amenities, many of us have become reliant on car ownership.
Of course, the best advice of all is to avoid taking on more credit if you’ve recently had or are having trouble maintaining existing financial commitments, but there are circumstances where a car may be essential.
Is it even possible to get car finance with bad credit?
In short, yes. However, it’s unlikely you’ll be able to borrow the required funds from a high street bank, instead you may have to consider using a specialist lender or broker.
Specialist lender/broker, Stoneacre, say that two out of three applicants are approved for their in-house finance offering and that figure takes into consideration things such as historic payment defaults CCJs and arrears.
Of course, those who are granted an approval will be subjected to less favourable terms. For a start interest rates can run from 22% – 62% depending on the lender in question, but as interest rates are usually determined based on an individuals specific set of circumstances, some could be ladened with even higher rates.
Looking at this in monetary terms. If you were to purchase a six year old Ford Fiesta (UK’s best selling car) on a hire purchase agreement for £5,000 and you choose to repay the money over 60 months. Meanwhile, the agreement came with an interest rate (APR) of 33.9% which sits somewhere in the middle of the scale, the total amount repayable would be £10,161.25. That’s more than double the value of the car at inception and by the time you’ve paid the finance off in full, the car could be worth next to nothing.
Of course, there are also many other factors that you should take into consideration before you jump into what could be the second biggest finance agreement you’ll ever commit to (second only to a mortgage).
Here are some of those factors:
- Deposit – Although not always the case, some lenders will require a deposit and even if it’s not compulsory, pulling together some cash for a deposit (think about selling your existing car) will reduce your monthly repayments along with the total amount of interest payable.
- Circumstances – Are you circumstances likely to chance in the short-term? For example, if you’re expecting a reduction in house-hold income then it’s probably not the best time to commit to car finance agreement.
- Other costs – When determining whether you have sufficient disposable income to cover the monthly repayments, it’s also important to budget for other motoring costs such as insurance, road fund licence and fuel. On top of that there’s also roadside assistance, the annual MOT test, maintenance and repairs.
What are the alternatives?
Have you stopped to considered the alternatives? Even if you have there may be one or two here that you hadn’t thought of.
Buy a run around – Do you really need to spend thousands on a car? A quick search for used cars under £500 on Auto Trader turns back several thousand results. Granted it might take you a couple of months to save up £500 and you might not get the car you’d hoped for, but it’s likely to make more financial sense.
Ask family or friends for help – Can you manage without a car? Depending on what you need a car for you may be able to ask family of friends to help you get about in the short-term.
Public transport – Is there a reliable bus network that you can use to take the kids to school or commute to work? A recent survey showed that in some situations catching a bus could be as much as 60% cheaper than owning a car.