Finding the perfect car can be a challenge, with so many different things to consider. But even once you’ve picked your dream car, you’ve then got to secure a car finance agreement. The difficulty here is that you need to demonstrate that you’re able to repay the loan.
Most lenders use a combination of your credit history and your affordability to determine whether or not you qualify for car financing. Your affordability is mostly about your income and expenditure, and whether you have a high disposable income. But what about your credit history? What makes a ‘good’ credit score?
What is a Good Credit Score?
There are three main credit reference agencies in the UK - Equifax, Experian and TransUnion. Each of these agencies hold a copy of your credit file, and use this information to calculate your credit score. Your score will then fall into one of a few categories - these are generally very poor, poor, fair, good, and excellent.
You may be surprised to learn that the average UK credit score comes under the ‘fair’ category. So less people have a great credit score than you may think! Though bear in mind that every lender will have their own criteria when it comes to calculating your credit score - it’s therefore not that easy to determine what a ‘good’ credit score is.
However, recent research from Experian can help show what sort of credit score you need to get car finance. This report found that the average credit score of someone getting a new car loan was 715, which is considered ‘fair’, while the average score for used car finance was 662, which falls under the ‘poor’ category. This would suggest that you don't need ‘good’ credit to take out vehicle finance.
If you’re unsure how high your credit rating is, you can check this for free online, using sites like Experian and Credit Karma. You’ll also find lots of helpful information about your credit file and credit rating on these websites.
How Do Car Finance Lenders Define a Good Credit Rating?
When making a loan decision, car finance providers tend to have similar basic criteria, though their other requirements may differ slightly. Most lenders ask that you:
- Have a full or provisional driving licence
- Have a regular income, earning £1,000 or over a month
- Are a UK resident, aged 21 or above
In order to have a good credit profile, or even an excellent one, you may need to meet the below criteria, in addition to the requirements above:
- Be a homeowner or have lived in a property for a long period of time
- Have a stable employment history, preferably working for your current employer for several years
- Have no CCJs, and few negative marks on your credit file
Lenders generally use a combination of your credit rating, along with their own algorithms to determine whether you have a good score. And as your credit score can not only affect your chances of acceptance, but also the interest rate you’re offered, it can be sensible to see if you’re able to boost your credit rating before applying for car finance.
How to Improve Your Credit Score
There’s not a lot you can do to change your credit rating in a short space of time, right? Actually, there might be! There are a number of simple things you can try in order to boost your credit score, and with some, you could see instant results. We’ve listed a few ways to improve your credit rating below:
- Pay Off Old Debt: If you’ve got old credit cards that you never use, or an outstanding loan, paying these off can improve your credit score, as it keeps your credit utilisation low
- Pay On Time: With any outstanding credit, making repayments on time will demonstrate that you’re responsible with your finances
- Register on the Electoral Roll: By registering at your current address, you can help businesses confirm your identity
- Check Experian Boost: If you haven’t already signed up with Experian Boost, they may be able to improve your credit rating instantly. Experian things like your Netflix subscription, to show that you’re able to make regular payments
Car Finance for Bad Credit
While improving your credit score is a great thing to do, even if you do have bad credit, you may still be able to take out a vehicle loan. Although your credit history will be taken into account, when lenders make a loan decision, other factors will also be considered. These include your income and expenditure, as well as your employment history.
As information stays on your credit file for around six years, a poor credit rating may be due to late or missed payments from years ago. Some lenders therefore understand that your credit score won’t always be a true reflection of your ability to repay credit.
There are furthermore car finance providers who specialise in bad credit loans. So no matter what your credit rating, you may still be eligible for vehicle finance. Simply use our car loan calculator to see what sort of rates you could be offered!