Why can’t I get car finance?
When you apply for car finance, there could be a chance that you could be denied. This could be for a number of different reasons and it’s important that you are aware of these reasons so you fully understand why you might be rejected for car finance.
In this article, we’re going to look at why you might not be able to get car finance and potential solutions or alternatives to car finance. Whether you have recently been denied car finance or simply curious as to why you might be rejected for car finance, hopefully, this article will answer all your questions.
What car finance options do I have?
In this article, we’ll be talking about three main lease and finance options;
- Hire purchase
- Personal contract hire
- Personal contract purchase
A hire purchase is a finance agreement and is essentially where you pay a monthly fee for your car for a set period of time. After that time is up, you own the car and have nothing else to pay. You can read more about hire purchase here or watch our video below. https://www.youtube.com/watch?time_continue=1&v=7JPPSrsUZ54 A personal contract hire, however, is a lease agreement. This is where you make monthly payments for your car for a set period of time. When that time is up, you hand the car back with nothing more to pay (subject to mileage and condition restrictions). You can read more about personal contract hire here or watch the video. https://www.youtube.com/watch?v=Wxq1SJ0H-iA A personal contract purchase is slightly different. It has the same premise as the other two, where you pay monthly payments for a set period of time, but you have more flexibility at the end of the contract. At the end of a personal contract purchase, you have three options;
- Hand the car back with nothing more to pay (subject to mileage and condition)
- Part-exchange the car
- Pay a one off payment (the Minimum Guaranteed Future Value) and own the car
So there’s a degree of flexibility with personal contract purchase as you can see. You can read more about personal contract purchase here or, you guessed it, watch the video below. https://www.youtube.com/watch?v=CeEqF1IdFfs
Why can’t I get car finance?
So we’ve been through your options, now you might be wondering why you can’t get car finance. Whether you have already been denied car finance or not, hopefully, this section will give you some clarity on the situation.
There is one main reason why somebody will be denied car finance and that’s bad credit. If you have bad credit, then you are very unlikely to qualify for car finance.
Why can’t I get car finance if I have bad credit?
When you apply for car finance, lenders look at your credit score and pretty much go by your credit score to judge whether you qualify for car finance or not (you can check your own credit score here). This is really down to efficiency. Most lenders use an auto-approval system which looks at your credit score and makes a decision based on that. However, it’s not the end of the world. If you get denied car finance based on the auto-approval system, then a human will take a look. They will look at your credit score, your payment history and how much borrowing you have and judge whether you qualify based on that. The more you want to borrow, the more senior the underwriter will be to approve you. For more information on bad credit and what your credit score is based upon, you can read our article here.
What are my options if I have bad credit?
If you have bad credit then it’s not all gloom and doom. You do have other options available to you.
There are specialist funders that work with those with bad credit to ensure they get car finance. So that is one option. However, when looking at this option we do recommend that you ask the vehicle broker lots of questions to make sure that they understand your circumstances fully. If you go through a vehicle broker that doesn’t understand your circumstances, you could be subject to a number of credit checks that will only serve to lower your credit score even more. For more information on what to look for in a vehicle broker then you can read our article here. Alternatively, you could lease your car in someone else’s name. This could be a family member, a friend, or a partner. However, not every finance house will allow this so it could limit your options for a car. For example, Mercedes finance will reject someone in your household if you have been declined, regardless of their credit score. Also, the person leasing the car will have to insure it and be the main driver. You would simply be a named driver. You can read more about leasing a car insured in someone else’s name here.
Another option may be short term leasing. This is an option for those who may have a default that is about to drop off soon and you can lease a car for anything between 1 and 12 months. You will have to pay more, but it will be for a shorter amount of time. Once your CCJ has fallen off your credit history you will be able to lease a car for a longer term. Plus, the payments you make on the short term rental will improve your credit score, so it’s a win-win really.
Employment, or unemployment, is another factor in whether you will qualify for car finance. The lenders will look at your incomings and your outgoings. If you don’t have a job to provide a source of income then you are much less likely to get approved for car finance.
The lenders need to know that you are going to be able to make the payments, and if you don’t have a source of income then this greatly reduces the chances of you being able to make the monthly payments.
Can I get car finance if I am on benefits?
If you are on benefits then there is a chance that you can get approved for car finance. Again, this will be based on whether you will be able to make the monthly payments.
If all, or part of, your income is from benefits and you have a good credit score then you may be able to qualify for car finance. The lender will base your ability to pay the monthly payments on your total income from the benefits against your financial outgoings. If it looks like you will be able to make the payments and you have a strong credit score then you do have a chance of getting car finance.
However, if you are on benefits and you have a poor credit score then your chances of getting approved for car finance are low. It doesn’t give them the impression that you will be able to afford the monthly payments.
What are my alternative options?
Again, it isn’t all doom and gloom. There is another option if you are unemployed or on benefits, or both. And that’s by getting a guarantor.
What is a guarantor?
A guarantor is somebody who will take over your monthly payments should you miss one. If you cannot pay then the finance house will turn to the guarantor who will have to pay on your behalf.
Your guarantor has to be;
- 21 or older
- Not be financially linked to you
- Have a strong credit rating
If they meet that criteria then they can be anyone you trust. Traditionally your guarantor would be a family member or a close friend but as long as they meet that criteria it doesn’t really matter. You can read more about guarantors in our article here.
You are a young person
If you are a young person then qualifying for car finance can be difficult.
This is because, as we’ve mentioned, lenders look at your credit score. And unfortunately, having no credit score or a very sparse credit history can be just as damaging as having a bad credit score. Lenders don’t know that you will be able to make the monthly payments because they don’t have enough proof that you have done in the past.
This isn’t always the case, and you could get approved for car finance if you have built up an impressive credit score already. However, being young and having very little credit history will put you at a distinct disadvantage.
What are my alternatives?
If lenders do consider you for car finance then they may ask you to put down a bigger deposit and sometimes this can be as big as 30%. But that is always an option.
If not, then you could also use a guarantor. This can make things much easier for a young person to get car finance so we do recommend looking at this option. Alternatively, if you are looking for a first car then you could look at a second-hand car. You can read our article on getting a new car as your first car versus a used car here. You can also read more about car finance for young people here.
In conclusion, there are a few reasons why you might not have qualified for car finance. But as you can see, there are solutions and alternatives to each of these reasons. If you are in doubt about anything, our finance experts will be happy to help. Feel free to give them a call on 01903 538835