Can You Get Bad Credit Car Loans? Busting Car Loan Myths

A bad credit car loan isn’t impossible

Buying a car is often the most significant purchase you will make during your lifetime, second only to property. For this reason, it’s advisable that you do your research to ensure you’re getting the best bang for your buck. This is particularly true if you have bad credit. Though a bad credit car loan may be more challenging to obtain, it’s not impossible. Some lenders specifically deal with bad credit car loans, whilst other lenders may offer specialised deals to those with bad credit. 

However, lenders take a larger risk when approving car loans for people with bad credit. For this reason, the interest rates of bad credit car loans may be higher, or other features affected. Fortunately, Oiyo are your experts in bad credit car loans Australia. This article will run you through features of a car loan you may want to consider before entering into an agreement, credit scores, other options for purchasing a car and common misconceptions about bad credit car loans. 

Features of bad credit car loans

Interest rates

Interest rates are the primary feature of loans that will be affected due to bad credit. Lenders often offer competitive interest rates. However, if you have a bad credit score, lenders will often offer you a higher interest rate to offset the increased risk of lending to you. 

Note that interest rates can either be fixed or variable. A variable interest rate, which changes depending on the market, is less common when it comes to car loans. Lenders will usually opt for a fixed interest rate loan, which is an agreed-upon rate that stays the same over the life of the loan. If you have bad credit, fixed interest rates are optimal as they make it easier for you to calculate your repayments each instalment.  

Other factors to consider

 As always with car loans, you will need to consider:

• The amount of the loan;
• The term of the loan;
• The frequency of repayments;
• Whether you can pay off your loan early;
• Extra fees and charges such as establishment, exit or redraw fees; and
• Whether you want a secured or unsecured loan.

Many of these features may operate slightly differently in a bad credit car loan. For example, your lender may require you to secure your loan with the car you’re purchasing. This is referred to as a secured loan and it protects the lender if you’re unable to repay the loan. 

Similarly, they may offer a strict loan term (repayment period) that you will have to consider whether you can afford. Speak to your lender to discover the features of bad credit car loans that they offer.

It is advisable that you do some of the calculations yourself to see how much a loan will realistically cost you. Compare the total amount to the purchase price of the car to give you an idea of whether a loan is a good option in your current circumstances. 

Credit scores explained 

Put simply, a credit score is a number that represents your financial habits. Typically, a credit score will be between 0 and 1,200 (the higher the number, the better the credit score). It is calculated from the information in your credit report. Essentially, your credit score reflects how well you are able to manage your debt and how reliable you are as a borrower. Your credit score can be affected by a variety of financial factors, such as:

• How reliable you are at paying your bills and repaying your loans;
• The amount of money you have previously borrowed;
• How long your credit history is; and
• Your current debt.

When applying for a car loan, lenders will review your credit history. This is so they can establish whether you are a reliable, responsible and trustworthy borrower. 

Note that factors such as your employment status, income and savings won’t affect your credit score. However, many lenders may still consider these factors when you apply for a loan. These details may give your lender a more complete idea of your current financial situation.  

Where can I check my credit score?

Credit scores can easily be checked via online credit reporting bodies. Equifax, Experian and Illion are the three online bureaus that have been approved by the Australian Government. They are obliged to provide you with a free credit report every 12 months (if requested). 

It’s advisable to check your credit score before applying for a car loan. This will ensure that you can be upfront and honest with your lender. In addition, it will provide you with some guidance as to what loan is right for you. For example, if you discover that you have a low credit score, you may start searching for a bad credit car loan.  

Comparing my credit score

Equifax, an Australian credit reporting bureau, has compiled a simple breakdown of credit scores. Once you obtain your credit report, compare your score to the table below. 

What other car loan options are out there?

In 2018 alone, the Australian Bureau of Statistics (ABS) reported that 20% of the 1.1 million cars sold were purchased using a car loan. However, obtaining a bad credit car loan may not be the right choice for everyone. It’s wise to consider all alternative options so you can make an educated decision regarding the best pathway for you.  

Rehabilitate your credit score

For example, if you are unsure if you can afford the higher rates that often accompany a bad credit car loan, you may consider postponing your car purchase and focus on rehabilitating your credit score. Rehabilitating your credit score can be done through effectively managing your debts – i.e. repaying your current debts on time and managing your incoming finances. A better credit score will qualify you for better car loan rates.

Hire purchase agreements 

If you don’t have the luxury of time to rehabilitate your credit score, consider a hire purchase agreement. A bad credit hire purchase agreement is similar to a bad credit car loan, though you are making an arrangement through your car dealer rather than a lender. In this method of financing, you will pay the dealer a deposit, then make regular repayments for the rest of the purchase value. You are essentially ‘hiring’ the car until you pay for it in its entirety. 

Note that this option is only viable if you have, or will foreseeably have, the funds to pay for the entire purchase price of the car. In this case, your income and savings may be a more important factor to your dealer than your credit score. However, bad credit car loan dealerships will still presumably check your credit report to ensure that you are reliable at paying your bills and other expenses. 

Credit card

An alternative manner in which you could purchase a car is by using your credit card. Whilst a car doesn’t seem like the sort of purchase you’d usually make on your credit card, you may be able to obtain a low-interest rate or 0% offer card. This will allow you to pay off the balance of your car without the hefty fees associated with loans. Note that credit card providers will also typically conduct a credit check, though some may still approve you with bad credit.

No credit check loans

The National Consumer Credit Protection Act dictates that lenders must ensure that the nominated finance option is suitable for the applicant. This means that lenders will conduct the relevant checks to see whether a loan is reasonably affordable for you. For this reason, it is not possible within Australia to obtain ‘bad credit car loans guaranteed approval’, nor ‘no credit check car loans’ from reputable lenders.

Other misconceptions about car loans

This page has told you that you can get a bad credit car loan, within reason. However, there are many other misconceptions out there. To ensure that you completely understand car loans and your ability to repay them, we’ve listed a few of the common misconceptions that many people fall for. 

If a lender approves your loan, you can afford it

Don’t rely on lenders to give you the green light. Only you know your personal financial circumstances and what you can reasonably afford. Of course, lenders will conduct thorough checks of your financials, including your credit report. However, you don’t want to get yourself caught in a tricky situation just because a lender approved your loan application. 

Loans aren’t worthwhile because I’ll be paying more in the long-run

If you’ve had some troubles with debt in the past, it’s understandable why you would want to stay away from accumulating more debt. However, not all debt is bad debt. Loans are a fantastic financing method to help you afford certain things in your life. Not many people have the money upfront for a house or car, after all. 

In addition, if you have bad credit, loans can provide a gateway to good credit. If you are able to keep up with all your loan repayments, this will demonstrate that you are a responsible lender. This will be reflected on your credit report. Future lenders will see that you have learnt how to be reliable and trustworthy with your finances, despite your history of bad credit.

Loans always cover 100% of the purchase price

Though this is certainly possible, the loan will most likely be accompanied by a much higher interest rate than usual. Having a larger deposit available for your loan means that you may be eligible for more favourable terms. Besides, it’s generally unwise to borrow money for 100% of the purchase price of an item, as you will need to have the means to repay this money. 

You can’t get a loan for a used car

Car loans are available for old and new cars alike. Note that with used cars, their history, ownership and some of their features cannot be guaranteed. This may alter the terms of the loan slightly. We recommend that you speak to your lender to clarify how buying a used car will change the loan. 

Looking to do more with your finances?

At Oiyo, we’re trying to change the way we talk about money. We’re not financial advisors, but we can offer helpful insights and information on finance to help you navigate your finances. 

We write helpful guides covering everything from personal finance to loans to insurance. Our aim is to make it easy for Australians to have access to simple, to-the-point financial guides. So, whatever financial query it is that you have, Oiyo is here to help!