Don't let a bad credit rating get in the way of a car loan.

A bad credit rating can be an obstacle if you’re looking to take out a loan to buy a car – but it doesn’t have to be the end of the world. True, some lenders may refuse to give you a loan or charge you higher interest rates. However, other lenders are comfortable with making bad credit car loans.

What is a bad credit car loan?

A bad credit car loan is a specialist car loan for borrowers with imperfect credit histories. Bad credit car loans can also be used by other borrowers who are regarded as high-risk, such as people who are self-employed or who are temporary residents of Australia. As always, lending policies differ from lender to lender.

If you’re thinking about taking out a bad credit car loan, use a car loan calculator to research different repayment scenarios. A car loan calculator will tell you whether or not you can afford a loan, based on variables such as loan size, loan term and interest rate.

If your monthly repayments are too high, you might be able to reduce them by opting for a longer loan term and/or a balloon payment at the end. Please note, though, that you’ll end up paying more over the life of the loan. (Conversely, a shorter loan term without a balloon payment would mean lower whole-of-loan costs.)

During your research, you should also weigh up whether you want a variable-rate loan or a fixed-rate loan. A variable loan could go up or down, which would either harm or help your financial position. A fixed loan, though, would never change, which would make it easier for you to budget.

Don’t forget that interest rates aren’t the only cost – there are also various fees and charges to consider. These may include loan establishment fees, loan account-keeping fees, car registration, car insurance. You may be allowed to take out a bigger loan to cover these costs – although that would mean you’d ultimately pay more in interest.

Finally, it’s often a good idea to put down a deposit on a bad credit car loan. The higher a deposit you can afford at the start of your car loan, the lower the principal you’ll be required to repay, and the more you’ll save on interest.

Getting a car loan with a poor credit rating can be difficult, but a bad credit car loan can help make your dream of owning a car a reality. Although these car loans are intended for people withbad credit ratings, there are a few things you might want to do to improve your chances.

1) Improve your credit rating

• Pay your bills on time 
• Don't over-apply for credit 

2) Maintain stable employment

• Bad credit car loan lenders generally prefer borrowers who have been in stable employment for at least 12 months.
• Lenders like to know that you’re able to hold down a job, so you will have a consistent source of income for making timely repayments.

3) Be honest about your financial position

• Describe your financial situation honestly to your bad credit car loan lender.
• Discrepancies between what you say and what’s in your credit file will be easily spotted by a lender.
• This can make you appear untrustworthy.

4) Avoid multiple loan applications

• Lots of applications will reflect negatively on your credit file, as will any rejections.
• Once you’ve found a preferred lender, have an honest in-depth chat with that lender about your position and your chance of securing approval.
• If the lender gives you the green light, you’ll know your car loan application is likely to be approved.

What is a bad credit rating?

A bad credit rating means that a credit reporting agency has assessed you as a high-risk borrower with a greater chance of defaulting. Each credit reporting agency uses its own algorithm to calculate a credit rating and to differentiate a good credit rating from a bad one.

What are the causes of a bad credit rating?

There are several possible ways you can damage your credit rating, including:

• Falling behind on your repayments
• Missing repayments altogether
• Defaulting on a loan
• Making too many credit applications
• Getting rejected for credit applications
• Exceeding credit limits on your credit card
• Declaring bankruptcy

What is comprehensive credit reporting?

In the past, credit files only contained negative credit events (such as late payments). Because they omitted positive events (such as on-time payments), they did not provide a fully accurate view of a borrower’s credit history. That meant even a small negative event, like a late bill payment, could damage a person’s credit history.

Hence the introduction, in March 2014, of comprehensive credit reporting, which includes both positive and negative events. That means that consumers have the chance to cancel out isolated negative events with a history of positive events, such as paying off without being late on a single repayment. 

How to improve a bad credit rating?

Having a bad credit rating isn't good. But it doesn't have to be a permanent state. As a general rule, fixing a bad credit rating takes time and requires effort, but it can be done. Here are a few things you can do to help fix a bad credit rating:

1) Order a free copy of your credit report

• Check your history for accuracy.
• If you find any errors in the file, bring them to the attention of the appropriate authority to be corrected.

2) Make all future repayments on time

• Thanks to comprehensive credit reporting, such positive events can help to cancel out the negatives.
• An obvious way to cancel out a history of late payments is to build up a record of on-time payments.

3) Consider debt consolidation

• If you have multiple outstanding debts, you can roll several higher-interest debts into a new lower-interest product, paying off the debt will become both cheaper and simpler.

4) Consider setting up direct debit payments

• Automating loan repayments for credit cards and personal loans can be an effective way of ensuring you never miss a payment

Final thoughts

Think carefully about your options before getting a bad credit car loan. If you don't think you can keep up the repayments, you may want to reconsider.

For more support managing your personal finances, check ASIC's Moneysmart, or contact the National Debt Helpline on 1800 007 007.