Since there’s a strict minimum age to apply for car finance, drivers may ask if the same goes for credit scores.
Unlike the minimum 18-year-old age requirement for vehicle finance, applicants don’t face a minimum credit score requirement. However, the lower your credit rating, the more complicated your application.
Good-to-excellent credit scores are preferred, but lenders understand that those with fair credit scores represent the majority of applicants, increasing their likelihood of working with you to beat competitors.
Learn more about credit score ranges, which types of finance are best for each tier, and little-known ways to improve your rating with the rest of our guide below.
What types of car finance are best for different credit ratings?
Credit scores generally fall into excellent, good, fair, and poor rating categories. While verifying which tier you fall into, it’s vital to note that there are three primary credit reference agencies, and your score will vary based on which agency you use. These credit reference agencies include Equifax, TransUnion, and Experian.
Equifax ranges include:
- Excellent: 811 to 1000
- Good: 670 to 739
- Fair: 580 to 669
- Poor: 300 to 579
TransUnion differs with the following ranges:
- Excellent: 628 to 710
- Good: 604 to 627
- Fair: 566 to 603
- Poor: 551 to 565
Lastly, Experian ranges are:
- Excellent: 961 to 999
- Good: 881 to 960
- Fair: 721 to 880
- Poor 561 to 720
In addition to increasing the likelihood of loan approval, a higher credit score often leads to lower interest rates and better loan terms. Certain zero per cent APR (annual percentage rate) or zero deposit agreements may be limited to those with good-to-excellent credit.
More favorable loan terms can include a greater borrowing limit and longer repayment period. Equifax, TransUnion, and Experian all provide free ways for applicants to check their credit scores.
What types of car finance are best for different credit ratings?
It’s easy to see how good-to-excellent credit optimises your chances of approval for all different types of car financing, but things get more complicated when applying with fair or poor credit.
Fair and low credit applicants often give themselves the highest likelihood of approval with HP (hire purchase) car finance. HP entails making a down payment on a car, typically 10% of the car’s total cost. Since the monthly payments go toward the vehicle’s total value, you’ll eventually become the owner when it’s paid off.
A final fee, called an option to purchase fee, may be required of HP borrowers to fully secure a car’s ownership. However, this expense is far lower than what would be incurred under a PCP (Personal Contract Purchase) agreement, often around £150. Lenders may view HP financing as lower risk for borrowers with fair or poor credit since they’ll own the vehicle until the option to purchase fee is paid.
Since PCP focuses on repaying the car’s depreciation over the borrower’s term, resulting in lower monthly payments, PCP down payments are frequently lower than HP. A PCP customer must make a larger final payment that accounts for the vehicle’s remaining value in order to own the car. This last expense is frequently called a balloon payment, and some PCP lenders may consider those with fair or poor credit as less likely to afford the cost.
What are average APRs for each credit score tier?
Car finance applicants with an excellent credit score can get an APR of between 5 and 7 per cent on average for new vehicles and 6.5 and 9 per cent for used, according to Clifton Private Finance. The Bank of England has a base APR rate of 4.75 percent.
Moderate APRs are around 7 to 11 per cent for new cars and 9 to 14 per cent for pre-owned. High APRs can reach 15 per cent for new vehicles and 20 per cent or more for used, while some APRs can hit astronomical rates such as 40 per cent.
It’s vital to understand that it’s almost impossible to calculate the average APR for a car loan due to the vast number of factors at hand. The numbers above are general estimates serving as a starting reference point.
Lesser known ways to improve your credit rating for car finance
Registering to vote is one of the most overlooked ways to improve your credit score before a car finance application. This registration serves as an indication that you’re a responsible citizen while verifying personal information like your address. You’ll also want any debts registered to a single address, as debts under multiple addresses can signal fraud to lenders.
Outstanding balances naturally affect your credit, but fewer realise that reducing the number of open credit cards under your name can improve your rating. It’s also essential to consider the timing of your loan. Defaulting on credit payments or declaring bankruptcy will stay on your record for six years, so if possible, it may be best to wait until this period is over.
How do lenders evaluate your risk other than a credit score?
While credit scores are a central reference point that lenders use to label your risk, it’s not everything. A car deposit will go to the dealer instead of a lender, but lenders can view a larger down payment as a sign of reduced risk. You’ll also be subject to lower monthly payments with a higher deposit, lessening the chances of defaulting on payments.
All applicants need to show proof of consistent income. While not required, applicants who show they’ve stayed at their current address for three or more years are typically viewed as more financially stable and trustworthy than those who haven’t.
Use your credit rating at Car Finance Today
Protecting your good-to-excellent credit scores is vital with their ability to help you secure better car finance, and maintaining a fair or less-than-fair credit score is equally as necessary so you can grow and not regress in your financial standing; that’s why Car Finance Today allows you to compare rates from dozens of lenders while protecting your credit rating.
Get started on receiving a quote from Car Finance Today with a simple press of a button, and check out some of our other blogs on topics like whether you need a driver’s licence to get vehicle finance approved.
