You’ll need a credit check to receive car financing since lenders use this information to help evaluate how likely you are to repay a loan. If you’re wondering whether applicants with fair credit can gain approval for car finance, the answer is yes.
Fair credit ratings typically fall into the following ranges:
- Experian: 721-880
- TransUnion: 566-603
- Equifax: 439-530
While lenders are more cautious about offering vehicle finance to borrowers with fair credit, they’re often open to the prospect since those with fair credit make up a significant portion of potential customers. This ratio incentivizes lenders to exercise more flexibility to corner the market against competitors.
Besides the competition aspect, lenders understand that many people are working to better their financial standing and can strengthen their case with supportive elements, which we’ll cover in this guide. They may also mitigate risk with borrowers using stricter loan terms and charges like higher interest rates.
The rest of our guide will examine what fair credit means for car finance, borrowing options for those with fair credit, and ways to optimize your chances of getting quality a loan with fair credit.
Keep reading below to gain more clarity on these topics.
What does fair credit mean for car finance?
Earlier, we established the general range for fair credit ratings. Still, it also helps to understand what qualifies as good and poor credit.
Car finance applicants with good credit ratings:
- Experian: 881-960
- TransUnion: 604-627
- Equifax: 531 or higher
Car finance applicants with good credit ratings:
- Experian: 881-960
- TransUnion: 604-627
- Equifax: 531 or higher
These comparisons show that fair credit is neither bad nor good. Factors that can contribute to fair credit include but aren’t limited to, periodic late payments, a shorter credit history, and recent credit applications. While these details can hamper your credit score, in most cases, they won’t stop you from receiving car finance approval.
With institutions understanding that there’s a large percentage of drivers with fair credit, you can find specialist lenders with terms tailored to your financial situation. In other words, you should be able to secure car finance quickly—but you’ll need to manage your expectations regarding the quality of your loan’s terms.
The truth of representative APR
You might’ve seen car dealers or TV advertisements promoting a low interest rate or representative APR (annual percentage rate) for those with fair credit. It’s vital to understand that at least 51 per cent of applicants will receive approval for an advertised representative APR, and those with fair credit are at a higher risk of falling into the other percentage.
Those taking out a car finance loan with excellent credit can pay APRs as little as 5 to 7 per cent for new vehicles—or 6.5 to 9 per cent for pre-owned, Clifton Private Finance reports. By comparison, moderate APRs are 7 to 11 per cent on average for new cars and 9 to 14 per cent for used. Lenders may also mitigate risks associated with fair credit borrowers by limiting their loan amount, requiring a larger down payment, and shortening the term’s length.
Options for car finance with fair credit
Specialist lenders and mainstream or traditional lenders most commonly help people acquire car finance with fair credit through HP (Hire Purchase) or Personal Contract Purchase (PCP) agreements.
HP involves placing a downpayment on a car that’s often around 10% of the vehicle’s total value. You’ll then make monthly payments on the car and become the owner when you pay it off since the monthly costs go toward the vehicle’s total value.
PCP down payments are often lower than HP since they focus on paying off the car’s depreciation during the borrower’s term, resulting in lower monthly payments. To own the car, a PCP customer must make a larger final payment accounting for the vehicle’s remaining value. This final cost is often referred to as a balloon payment.
HP borrowers may have to pay a final fee to fully secure a car’s ownership, but this cost, known as an option to purchase fee, is significantly less than what you’d owe with a PCP agreement. The average purchase fee option is £100 to £200, according to MoneyHelper.
Tips to boost your chances of receiving better terms with fair credit
While fair credit car finance applicants can incur expenses like higher interest rates, you can take steps to optimise your credit rating before starting the process. First, you’ll need to assess your credit rating with your most recent report thoroughly. While evaluating your last credit report, check for any errors that could boost your rating if corrected.
Factors to spot on your credit report that could hinder your rating include:
- Incorrect personal information
- Wrong payment history
- Duplicate accounts
- Closed accounts displaying as open
- Joint accounts with another name
While joint accounts with another name won’t lower your credit rating if the other person is financially responsible, joint accounts with those not in good financial standing can have a negative effect. Besides reducing debt and paying statements on time, doing your best to avoid multiple loan payments is another way to improve your credit rating. Saving for a larger down payment will naturally reduce the money you owe on a loan each month.
If you’re especially concerned about higher car finance interest rates as someone with fair credit, a guarantor could help you secure better terms since they agree to cover payments if you default.
Are you someone with fair credit that’s looking to compare car finance rates? Learn how to simplify this process below through Car Finance Today’s easy-to-use platform.
Car Finance Today helps fair credit borrowers
Car Finance Today knows that protecting your credit score is one of the most essential aspects of applying for car finance with a fair credit rating, as slipping into poor credit can have significantly negative implications on your terms. That’s why our site allows you to check for quotes while protecting your credit score.
We also don’t force those with fair credit to sacrifice flexibility to secure vehicle financing. Car Finance Today helps you compare an assortment of loans with results tailored to individual factors like your credit rating.
Estimate your monthly payments today with our site’s car finance calculator, and check out our other blog topics, like whether there’s an age or licence requirement for vehicle finance.
